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Finance & Projects Update

EPC CONTRACTS FOR

WIND ENERGY PROJECTS - SOUTH AFRICAN RE IPP PROGRAMME -

LESSONS LEARNED FROM PHASES 1 AND 2

(OCTOBER 2012)

KEY CONTACTS

Kieran Whyte

Director, National Practice Head - Projects and

Infrastructure

DLA Cliffe Dekker Hofmeyr

[email protected]

Damian McNair

Partner, Head of Finance and Projects Group, Asia Pacific

DLA Piper

[email protected]

INTRODUCTION

Engineering, Procurement and Construction (“EPC”)

Contracts are the most common form of contract used to

undertake construction works by the private sector on

large scale and complex infrastructure projects1. Under an

EPC Contract, a contractor is obliged to deliver a

complete Facility to a developer who need only ‘turn a

key’ to start operating the Facility; hence EPC Contracts

are sometimes called turnkey construction contracts. In

addition to delivering a complete Facility, the contractor

must deliver that Facility for a guaranteed price by a

guaranteed date and it must perform to the guaranteed

level. Failure to comply with any requirements will

usually result in the contractor incurring monetary

liabilities.

Due to the flexibility, the value and the certainty derived

to sponsors and lenders, EPC Contracts are being used as

the main form of construction contract by project sponsors

bidding for projects under South Africa's Renewable

Energy Independent Power Producer ("RE IPP")

Procurement Programme.

This paper is set out in two parts. Part 1 outlines the

current context of renewable energy policy and legislation

in South Africa, lessons learned from the lenders'

bankability requirements and other key issues arising in

relation to EPC Contracts in the context of the RE IPP

Programme. Part 2 sets out the key features of EPC

Contracts in the context of renewable energy projects

more broadly.

Although the RE IPP Programme covers a number of

types of renewable energy technologies (discussed further

over the page), this paper focuses specifically on wind

energy and the key issues arising in EPC Contracts for

wind projects.

mailto:[email protected]

2 EPC Contracts FOR

WIND ENERGY PROJECTS -

South African RE IPP Programme -

Lessons learned from Phases 1 and 2

(October 2012)

PART 1 - RENEWABLE ENERGY IN SOUTH

AFRICA AND THE RE IPP PROGRAMME

Policy context

On 17 March 2011, the South African Government

approved the Integrated Resource Plan 2010 ("IRP") for

electricity. The IRP outlines the Government's plan to

increase South Africa's total installed electricity capacity

from 260 TWh in 2010 to 454 TWh in 2030, an increase

of more than 170% over the 20 years. Of this amount,

42% of the new installed capacity is planned to be sourced

from renewable energy. The Government's key policy

mechanism for achieving the targeted amount of installed

capacity of renewable energy is the RE IPP Programme.

RE IPP Programme - overview

Under the RE IPP Programme, Bidders submit Bid

responses to construct and operate renewable energy

projects and sell power to Eskom.

The renewable energy technologies comprising the RE

IPP Programme, and their envisaged split, are set out

below:

Technology Proposed

amount

Percentage

allocation

Onshore wind 1850MW 49.7%

Concentrated

Solar Power

200MW 5.3%

Solar

Photovoltaic

1450MW 38.9%

Biomass 12,5MW 0.3%

Biogas 12,5MW 0.3%

Landfill gas 25MW 0.7%

Small hydro

(<10MW)

75MW 2%

Small Projects

IPP

(max MAW)

Total threshold

of 100MW

2.8%

Total 3725MW

Each of the renewable energy technologies comprising the

RE IPP Programme have a set minimum capacity and

maximum installed capacity.

The RE IPP Programme is comprised of five phases,

pending subscription by Bidders of the total allocation of

MW for each technology. All allocations for each form of

technology are made available during the each Bid

submission phase. Where an allocation is

undersubscribed, the remaining MW will be made

available to Bidders in the following phase.

The First Bid Submission Date was 4 November 2011 and

the first selection of 28 Preferred Bidders was announced

at COP 17 in Durban on 7 December 2011. Preferred

Bidders were initially required to finalise all of their

contractual arrangements by 22 May 2012 and to reach

financial close by 19 June 2012. However, the date for

financial close has subsequently been extended and

remains outstanding, with Preferred Bidders requested to

extend their Bid validity period until the end of October

2012.

The Second Bid Submission Date was 5 March 2012, and

19 Preferred Bidders were announced on 21 May 2012.

Preferred Bidders were initially required to reach financial

close by December 2012, but this date has been extended

to 18 - 28 March 2013. The Third Bid Submission Date

has also been extended from 1 October 2012 to 7 May

2013.

RE IPP Programme - proposed update

It has been recently reported that the DOE is proposing to

procure an additional 3200 MW of renewable energy

capacity by 2020, over and above the 3725 MW being

procured currently under the RE IPP Programme.

On 9 October 2012, Engineering News reported:

Addressing a South Africa-Spain Business Summit in

Johannesburg, Department of Energy (DoE) acting chief

director Thabang Audat said the proposal had been sent

to the National Energy Regulator of South Africa (Nersa)

for its concurrence on the additional allocation.

He was unable to provide details as to how the new

allocation would be divided between the various

renewables technologies, but said this breakdown would

be provided in a Ministerial determination, which would

be published in Government Gazette within seven working

days of Nersa's concurrence.

The new renewables allocation meant that there would

now be more than 4 360 MW of capacity available for

future bidding rounds, with the next round scheduled to

close in May, 2013.

Prior to this extension only 1 165.6 MW of capacity

remained unallocated under the REIPPP, following two

bidding rounds during which a total of 47 projects were

named as preferred bidders.

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Wind Farm Projects

A wind farm typically comprises a series of wind turbines,

a substation, cabling (to connect the wind turbines and

substation to the electricity grid), wind monitoring

equipment and temporary and permanent access tracks.

The wind turbines used in commercial wind farms are

generally large slowly rotating, 3 bladed machines that

typically produce between 1.5 MW and 3 MW of output.

Each wind turbine is comprised of a rotor, nacelle, tower

and footings. The height of a tower varies with the size of

the generator but can be as high as 100m. The number of

turbines depends on the location of the wind farm and

capacity of the turbines.

The amount of power a wind generator can produce is

dependent on wind availability and speed. The term

“capacity factor” is used to describe the actual output of a

wind energy Facility as the percentage of time it would be

operating at maximum power output.

Wind farms need to be located on sites that have strong,

steady winds throughout the year, good road access and

proximity to the electricity grid.

Contractual structure for projects under the RE

IPP Programme

An overview of the typical contractual structure for a

project financed renewable energy project is set out in

Part 2. The outline below relates specifically to the

contractual structure used under the RE IPP Programme.

Under the RE IPP Programme, Bidders are also required

to submit as part of their Bid the detailed heads of terms

of the contracts that they would enter into with their

contractors, equipment suppliers and other subcontractors

if selected as a Preferred Bidder. In most cases this will be

comprised of a detailed heads of terms for an EPC

Contract and an Operating and Maintenance ("O&M")

Contract.

If a Bidder is selected as a Preferred Bidder, it will

negotiate and prepare fully termed EPC and O&M

Contracts based on the detailed heads of terms submitted

as part of their Bid.

Preferred Bidders will be required to enter, as project

company, into the following non-negotiable agreements

with the relevant counterparties in order to reach financial

close and develop the Facility:

Power Purchase Agreement ("PPA") with Eskom;

Implementation Agreement ("IA") with the

Department of Energy ("DoE");

Transmission Agreement or Distribution Agreement

(as relevant, depending on which network the Facility

will connect to); and

Direct Agreement,

(together "the Project Documents").

Key issues and 'lessons learned' under the RE IPP

Programme to date

Overview

We have set out below some of the key requirements that

Preferred Bidders will be required to meet as the project

company under the Project Documents, including our

experience of the lenders' bankability requirements from

Phase 1 and Phase 2 of the RE IPP Programme, and

consider the effect of these requirements and how they

may be flowed through to the relevant contractors. The

terms "Buyer" and "Seller" are used below in relation to

obligations set out in the Project Documents, referring to

Eskom and the project company respectively. The

capitalised terms used in this section relate to defined

terms from the Project Documents.

Overriding pass-through of obligations from the

Project Documents

To limit gaps in liability and minimise the need for

additional sponsor support, project companies will seek to

ensure that the EPC Contracts used in respect of RE IPP

Programme projects are bankable, in particular the

obligations, risks and liabilities under the PPA and other

Project Documents must be passed through to the

contractor to the fullest extent that is possible and

commercially feasible. The overriding "pass through"

principle is that the contractor must take account of the

PPA and other Project Documents in performing the EPC

Contract and must not put the project company in breach

of those documents. The EPC Contract should provide for

an acknowledgement of pass through and assumption of

risks by the EPC Contractor. We recommend that the

following clause be included:

"The Contractor has reviewed the terms of the Power

Purchase Agreement, Implementation Agreement,

[Distribution Agreement or Transmission Agreement]

and Direct Agreement (Project Documents) and,

subject to specific limitations agreed in this Contract;

assumes those risks relevant to the Works which are

assumed by the Owner under the Project Documents;

will perform its obligations under the Contract in such

manner as to allow the Owner to comply with its

obligations under the Project Documents regarding

completion of the Facility; and must not do anything to

prevent or interfere with the Owner's performance of

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its corresponding obligations under the Project

Documents."

There are three categories of obligations, risks and

liabilities that should be passed through to the contractor:

explicit obligations;

risks or potential liabilities, but no specific obligations;

and

requirements to take certain action to allow the project

and the project company to comply with the

requirements of the Project Documents.

If a particular risk cannot be passed through to the

contractor, the risk will need to be mitigated by some

other means, such as through insurance and/or by the

provision of some additional form of sponsor support.

'Pass through' and linked entitlements

Where any entitlements of the contractor arise as a result

of the project company being entitled to relief under the

Project Documents, including in relation to events of

Force Majeure, as well as for Compensation Events,

System Events or Unforeseeable Conduct, to avoid gaps

in liability under the Project Documents and the need to

provide additional sponsor support, the contractor's

entitlement under the EPC Contract should be linked to,

and limited by, reference to what the project company (as

the Seller) receives under the Project Documents, rather

than what the project company is or may be entitled to.

We recommend that the following clause be included,

subject to the project company being required to comply

with the process for claiming relief under the Project

Documents:

"the Contractor agrees to accept in full and final

satisfaction of any Pass Through Claim, the amount

agreed or determined as payable under the Project

Documents."

Force Majeure

The definition of 'Force Majeure' under the PPA is an

exclusive and relatively restrictive definition. For further

discussion about force majeure clauses generally, please

refer to the force majeure section in this paper below.

To minimise the risk of the project company being

required to grant an extension of time to the contractor

when the project company is not able to obtain relief

under the PPA, the definition of force majeure in the EPC

Contract should be back to back with the definition in the

PPA.

In addition, given that the PPA does not provide a right to

terminate for an extended force majeure, lenders will

generally require that no such right to terminate is

provided in the EPC Contract or, if such right is provided,

that additional sponsor support is also provided.

If an event of Force Majeure occurs prior to the Scheduled

COD, the PPA allows for an extension of time by

postponing the Scheduled COD for 'such time as shall be

reasonable for such a Force Majeure event, taking into

account the likely effect of the delay' (clause 16.5).

The Seller will also be entitled to relief if, during any

12 month period, the cumulative duration of Force

Majeure events or their consequences (each of which

event must last 24 hours or longer) exceeds 60 or more

days and the Seller is not entitled to bring a claim under

any insurance policy is required to hold under the PPA in

respect of those Force Majeure events. In such

circumstances, clause 16.9 of the PPA provides the Seller

with an entitlement to an extension of the Term and/or

other relief from the Buyer to 'place the Seller in the same

overall economic position as it would have been in but for

such Force Majeure event', provided that any

compensation must not be in monetary form and the total

extension of the Term must not exceed ten years.

To avoid any gaps in liability arising, the project company

should ensure as far as possible that the relief available

under the EPC Contract for a Force Majeure event is back

to back with the provisions of the PPA.

We recognise that this may be difficult to achieve in

practice given the relatively narrow definition of Force

Majeure in the PPA and the Self Build Agreement (to be

discussed later in this paper).

Compensation Event

The definition of 'Compensation Event' under the PPA

includes material breaches by the Buyer of obligations

under the PPA, including failure to make payments at the

relevant time.

Under clause 15.3 of the PPA, the Seller will be entitled to

both an extension of time and additional costs (either

additional cost incurred by the Seller before the

Commercial Operation Date or capital expenditure at any

time) for a Compensation Event. Relief under the EPC

Contract for a Compensation Event should be back to

back with this.

Under clause 15.3.2 of the PPA, the Buyer has the option

to make payments for additional costs in respect of a

Compensation Event in either a lump sum or by

instalments. If the Buyer chooses to pay the amount in

instalments, lenders will need to consider how the

increased costs during construction or the additional

capital costs after the Commercial Operation Date will be

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financed. To address this issue, we recommend that the

following clause be included:

"Subject to the Contractor complying with the notice

and other requirements under this Contract, to the

extent that the Owner is entitled to claim relief under

the Project Documents for any System Event,

Compensation Event, Force Majeure and

Unforeseeable Conduct, the Contractor is entitled to

claim corresponding relief under the Contract mutatis

mutandis, irrespective of whether or not the Owner

actually claims such relief under the Project

Documents, provided that where a payment must be

made by the Owner to the Contractor similar to the

payment contemplated in clause 15.3.2 or 17.6 of the

PPA, the Owner will make payment in the manner

contemplated in clause 15.3.2.2.1 or 17.6.1 of the PPA

(as the case may be), and not in the manner

contemplated in clause 15.3.2.2.2 or 17.6.2 of the PPA

(as the case may be). Accordingly, the Owner will not

be relieved from its obligations due to its failure to

comply with the notice and other requirements under

the Project Documents, or its failure to claim relief

under the Project Documents."

System Event


relief for a 'System Event', defined as delays in connecting

the Facility to the grid and the unavailability of the grid.

The definition of 'System Event' specifically excludes

circumstances 'caused by any natural force or event'.

However, the PPA does not provide any definition of the

term 'natural force or event'. In addition, under clause 14.1

of the PPA, the Seller is not entitled to bring a claim in

relation to a System Event unless the time that the System

Event(s) have endured is greater than the Allowed Grid

Unavailability Period for a Contract Year or the period

that the Commercial Operation Date is delayed beyond the

Scheduled COD.

Given that the duration of the 'Allowed Grid

Unavailability Period' is not insignificant, representing 2%

of the total hours available in a year, this may be a

material issue and may not be able to be fully passed

through to the contractor. If the contractor will not accept

a full pass through of risks relating to the Allowed Grid

Unavailability Period and the exemption for a 'natural

force or event', the project company may be required to

provide some form of sponsor support.


both postponement of the Last COD and/or a Deemed

Energy Payment for a System Event. 'Deemed Energy

Payments' are defined under the PPA as an amount

payable by the Buyer to the Seller in respect of Energy

Output that would otherwise be available to the Buyer, but

for a System Event or a Compensation Event, calculated

in accordance with Schedule 6 of the PPA with reference

to the Commercial Energy Rate and dependant on the

period in respect of which such payment is due and

payable.

The method by which the amount of the Deemed Energy

Payment is determined is set out in Schedule 6 of the

PPA. To the extent that this amount will not cover the

contractor's delay costs during a System Event, this will

become a risk to the project company which would

require appropriate sponsor support.

Unforeseeable Conduct

The term 'Unforeseeable Conduct' under the PPA is

broadly equivalent to change in law risk. Like Force

Majeure, the matters included in the definition of

Unforeseeable Conduct are narrower than would generally

be expected and, for example, do not extend to changes in

law or tax that are not discriminatory to the project. The

EPC Contract should be back to back with this definition.


compensation or relief from the Buyer to restore the

general economic position of the Seller but for the

Unforeseeable Conduct. This may take the form of

monetary compensation or an extension of time. Note also

that if the Seller benefits as a result of the Unforeseeable

Conduct, the Seller will be required to pay the value of

any such benefit to the Buyer.

As with a Compensation Event, the PPA provides the

Buyer with the option under clause 17.6 to pay monetary

compensation for Unforeseeable Conduct as either a lump

sum payment or in equal monthly instalments for the

remainder of the Term. Please refer to our suggested

clause above in the context of Compensation Events that

addresses this issue.

Scheduled COD

Under clause 4.6 of the PPA, for every day that the

Commercial Operation Date is delayed beyond the

Scheduled COD (unless the delay is due to an event of

Force Majeure, System Event, Compensation Event or

Unforeseeable Conduct), the Operating Period will be

reduced by an additional day and the Expiry Date will be

brought forward by one day. As a result, the Seller will

effectively lose 2 days for each day that the Commercial

Operation Date is delayed beyond the Scheduled COD.

The quantum of delay liquidated damages in the EPC

Contract must factor in the total loss or revenue to the

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project due to the reduced number of days, and should

also be reviewed by the project technical advisors.

Achieved Capacity and Contracted Capacity

Under clause 4.8 of the PPA (save for the Landfill Gas

PPA which is discussed in more detail below), if the

Achieved Capacity of the Facility on the Commercial

Operation Date is less than the Contracted Capacity for

the Facility (being the anticipated capacity of the Facility),

the Contracted Capacity will be permanently reduced to

the Achieved Capacity of the Facility reached as at the

Commercial Operation Date. Regardless of any further

testing performed, the Seller will not be entitled to

increase the installed capacity of the Facility above the

new Contracted Capacity at any time in the future for any

reason, and accordingly this restriction poses a substantial

risk to a project's bankability.

To mitigate this risk, the schedule of the project and the

timing of testing should be aligned with the Scheduled

COD and Last COD dates under the PPA to ensure that

adequate time is allowed for the Facility to achieve the

Contracted Capacity by the Last COD under the PPA

The risk of the project company may also be mitigated by

ensuring:

that the performance testing and performance

guarantee framework aligns with the Contracted

Capacity and the output capacity in the financial

model; and

that the quantum of the Performance Liquidated

Damages is sufficient to compensate the project

company for the additional costs and lost revenue

resulting from the under-performance of the Facility,

and should be reviewed by the project technical

advisers.

Performance Testing and Performance Guarantees

As a consequence of the PPA providing for the Achieved

Capacity to be fixed at the Commercial Operation Date

for all Facilities other than landfill gas Facilities (as

discussed above), it is necessary to test (among other

things) the Achieved Capacity of the Facility at

Commercial Operation.

However, a number of types of performance tests, such as

power curve tests for wind Facilities, are only able to be

performed after the relevant Facility has been operating

for a specified period of time (often 1-2 years).

To accommodate this split, it is common under the RE

IPP Programme to have a pre-COD and post-COD two-

stage performance testing process, with corresponding

pre-COD and post-COD performance guarantees. There is

also a split arrangement in terms of the remedies available

if the contractor fails to achieve the pre-COD or post-

COD performance guarantees.

The pre-COD performance guarantees are usually

comprised of a Contracted Capacity guarantee. As

discussed above, the restrictions under the PPA mean that

if the Achieved Capacity of the Facility on the

Commercial Operation Date is less than the Contracted

Capacity for the Facility, the Contracted Capacity will be

permanently reduced to the Achieved Capacity of the

Facility reached as at the Commercial Operation Date. If

the Contracted Capacity of the Facility is reduced, the

Facility will not be able to generate energy at the rate that

has been included the financial model for the project. To

avoid creating a revenue shortfall, an appropriate remedy

for a failure to meet the pre-COD performance guarantees

is a reduction in the contract price paid to the contractor

that is proportional to the amount by which the Contracted

Capacity has been reduced.

As with other types of performance guarantees,

performance liquidated damages are an appropriate

remedy for a failure of the contractor to achieve the post-

COD performance guarantees.

We have included sample testing, performance guarantee

and liquidated damages schedules in Appendix 2 that

indicate this split between pre-COD and post-COD

testing, performance guarantees, reduction in contract

price and performance liquidated damages.

Site risk

Under clause 3.2 of the PPA, all risk in relation to the

project site (including hydrological, geotechnical and

other risks) rests with the Seller.

Lenders will expect that this risk is fully passed through to

the contractor under the EPC Contract. However,

depending on the specific conditions or circumstances

relating to a particular project site, the lenders may be able

to obtain some comfort from appropriate site

investigations being carried out before and after the

Preferred Bidder selection process. If the contractor does

not accept the full pass through of pre-existing site risk,

the project company may need to provide some form of

additional sponsor support.

Application of insurance proceeds

Under clause 19.2 of the PPA, the proceeds of any

insurance claim (other than claims under any loss of

revenue policies) must be applied by the Seller towards

the reinstatement or repair of the Facility unless the Buyer

otherwise agrees.

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The main issue that arises is that lenders will want to

control the application of insurance proceeds, particularly

if those proceeds are of a certain threshold and if repairing

the Facility is not economically viable. Steps that could be

taken to mitigate this risk are to ensure that the lender is

identified as a loss payee under the all risks insurance

policy in relation to the project, and to provide the lender

with a priority security interest over all assets of the

project company including insurance proceeds.

Economic Development Obligations

The Seller must meet all Economic Development

Obligations placed on it in relation to the project. These

are set out in schedule 2 of the IA, and relate to job

creation, local content, ownership element obligations,

social development, preferential procurement and

management control obligations.

If the Seller does not comply with the Economic

Development Obligations, the Seller may have to pay an

amount (set out in schedule 2 of the IA) to the DOE or

accrue Termination Points. If the Seller accrues more than

9 Termination Points in a consecutive 12 month period,

DOE may terminate the IA, which will also allow the PPA

to be terminated.

Again, to avoid any gaps in liability arising the project

company should seek to ensure that all relevant Economic

Development Obligations are passed through to the

contractor under the EPC Contract to the extent relevant,

including exclusions from the cap on liability and from

the exclusion of consequential loss in respect of liability

arising out of any failure of the contractor to comply with

the Economic Development Obligations that results in the

project company being in breach of a Project Document.

In addition, the lenders will generally require a buffer

period under the EPC Contract whereby a process will be

triggered if the Owner accrues a certain number of

Termination Points (for example, six Termination Points

in a 12 month period) as a result of the Contractor failing

to comply with the Economic Development Obligations.

This threshold number should be set lower than the

number of Termination Points that provide the DOE a

right to terminate the IA, in order to provide a step in or

cure period for the project company and/or the lenders to

ensure that the relevant Economic Development

Obligations are met.

Corrupt Acts

Under the IA, the Seller is required to warrant that, in

entering into the Project Documents, that it has not

committed any 'Corrupt Act', defined as any offence in

respect of corruption or corrupt activities contemplated in

the Prevention and Combating of Corrupt Activities Act,

2004. The consequence of the Seller (or any shareholder,

contractor or affiliate of the Seller) admitting to or being

convicted of a Corrupt Act is very serious, with the DoE

having an immediate right to terminate the IA, which will

have the effect of simultaneously terminating the PPA. As

a result, the project company should require the EPC

Contract to contain back to back termination rights and,

given that the lenders will generally expect to be kept

whole, exclusions from the cap on liability and from the

exclusion of consequential loss in respect of liability

arising out of Corrupt Acts.

Liability

Contractors will generally require a 'cap' or limit to be

placed on their aggregate liability under the EPC Contract

and for liability in respect of consequential or indirect loss

to be excluded.

In our experience under the RE IPP Programme, such caps

have generally been subject to number of exceptions,

including where the liability arises as a result of (among

other things):

a breach of any Project Document by the project

company as a direct result of a breach by the

contractor of its obligations under the EPC Contract

(including in relation to a failure to meet the Economic

Development Obligations or committing a Corrupt

Act);

death, personal injury or cases of third party property

damage, unless attributable to any negligence, wilful

act or breach of the EPC Contract by the project

company;

a breach of various indemnities provided by the

contractor to the project company, including a breach

of the requirement to obtain and maintain all necessary

consents or of any of the warranties provided in

respect of intellectual property;

a breach of the confidentiality provisions of the EPC

Contract; and

the fraud or wilful misconduct of the contractor, its

personnel or its subcontractors.

Exclusion of special or consequential loss

Clause 28.1.2 of the PPA provides that neither party shall

be liable to the other party for any Special Loss suffered

as a result of any act or omission of the first party. 'Special

Loss' is defined as any loss or damage which does not

constitute a direct loss, including indirect losses,

consequential or special losses and wasted or increased

overheads.

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In some instances, contractors may seek a broader

exclusion of special or consequential loss than that

provided under the PPA. To minimise the risk of gaps in

liability arising, the project company should ensure that

any exclusion provided is back to back with what is

provided under the PPA.

As mentioned above in relation to caps on liability, typical

exceptions to the broad exclusion of consequential loss

provided under the RE IPP Programme include:

liability which arises from a breach of any project

document by the project company as a direct result of

a breach by the contractor of its obligations under the

EPC Contract (other than liability for Special Loss as

defined under the PPA);

wilful misconduct;

delay liquidated damages;

performance liquidated damages;

recovery of insurance proceeds;

a breach of various indemnities provided by the

contractor to the project company, including a breach

of the requirement to obtain and maintain all necessary

consents or of any of the warranties provided in

respect of intellectual property; and

a breach of the confidentiality provisions of the EPC

Contract.

Grid connection and Self-Build

A key issue for the consideration of project companies is

the extent to which additional works may be required to

enable a Facilities to obtain adequate access to the

Transmission System or the Distribution System, as

relevant. These additional works may be comprised of

connection works to be performed by Eskom and/or

connection works to be performed by the project company

(known as 'self-build' works). Some project companies in

the RE IPP Programme have elected to pursue the self-

build option due to a need to accelerate project works in

line with the schedule.

The connection works are governed by a set of standard

form documents. For example, the key documents for the

connection of a Facility to the Distribution System are:

the Budget Quote (containing the terms and conditions

for the connection works to be performed by Eskom to

connect the Facility to the Distribution System);

the Distribution Connection Use of System Agreement

(containing the terms and conditions of the connection

of the Facility to the Distribution System, the access

and use of the Distribution System and the delivery of

electrical energy from the Facility); and

if applicable, the Self-Build Agreement (containing the

terms and conditions for the self-build of Eskom

Distribution Connection Assets by customers).

In selecting the self-build option, project companies need

to consider the additional risks that may arise, including:

additional delays and costs incurred in procuring

access land required to complete the self-build works;

delays in completing the self-build works that may

delay other elements of the project works and

potentially impact on the project company's right to

receive compensation in respect of System Events

under the PPA; and

other risks that may arise under the Self-Build

Agreement itself.

Project companies also need to be aware that under the

Self-Build Agreement there is a requirement that all

'Contract Works' (as defined in that agreement) are

performed only by an Eskom Accredited Contractor.

Project companies should also be aware that the definition

of Force Majeure provided under the Self-Build

Agreement is broader than the definition of Force Majeure

under the PPA, which creates a potential gap in liability.

Early Operation and Staged Completion

The PPA provides a process for the 'early operation' of

one or more units of the Facility to occur before (but no

more than 180 days before) the Scheduled COD. Early

Operating Energy Payments are available for any energy

produced during the Early Operation Phase at a rate of

60% of the Commercial Energy Rate that is available after

Commercial Operation of the Facility is achieved.

Although the project company is permitted to operate one

or more units of the Facility under the 'Early Operation'

provisions of the PPA, it is not permitted to have phased

or staged completion or commissioning of the Facility.

Although this is not specifically stated in the Project

Documents, it has since been clarified by the DoE in

Briefing Note 4.

Accordingly, the project company will not be entitled to

apply for certification or to achieve Commercial

Operation in respect of the Facility before the Scheduled

COD. These limitations need to be taken into account in

preparing the financial model and in considering any early

completion bonuses that may be payable to the contractor.

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Dispute resolution

Clauses 26 and 27 of the PPA set out the dispute

resolution process to be followed in respect of any dispute

arising in relation to or in connection with the PPA. It

provides an escalating process from internal referral to

litigation in the High Courts. It also provides for a 'fast

track' dispute resolution process for disputes to be

determined by an independent expert.

Given that many of the parties involved in the RE IPP

Programme projects are international, in our experience

there has been a strong preference for the use of

arbitration (rather than litigation) as the preferred dispute

resolution mechanism under EPC Contracts. In these

circumstances, the project parties need to consider the

implications of this potential mismatch and the extent to

which the EPC Contract can be aligned with the PPA to

allow the joinder of disputes where required. These issues

should be considered on a case by case basis, depending

on the identity of the relevant parties,

Other issues

In addition to the issues set out in this section that are

specific to the RE IPP Programme, many of the issues set

out in Part 2 are also relevant in the context of the RE IPP

Programme.

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PART 2 - EPC CONTRACTS - GENERAL PRINCIPLES AND KEY TOPICS

THE CONTRACTUAL STRUCTURE

The diagram below illustrates the basic contractual structure of a project financed renewable energy project using an EPC

Contract.

Government

Project Company

O&M Contractor

EPC Contractor

Network Distributor

Offtaker

Sponsors Lenders

Concession / Implementation Agreement

Equity Support /Shareholders Agreement

Security…..

EPC Contract O&M ContractConnection Agreement

PPA / TollingAgreement

Tripartite /

Direct Agreements

Financing and.

Agreements..

The detailed contractual structure will vary from project to

project. However, most projects will have the basic

structure illustrated above.

We note that in some renewable energy projects,

particularly wind farms or hydro plants, the EPC Contract

may be split into an Equipment Supply Contract (such as a

Wind Turbine Generator Supply Contract) and a Balance

of Plant ("BOP") Contract, where the performance

guarantee element is dealt with in a Warranty Operating

and Maintenance Agreement ("WOM"). The principles

are essentially the same as set out below and we will

discuss specific components later in this paper.

As can be seen from the diagram, the project company

will usually enter into agreements which cover the

following elements:

An agreement which gives the project company the

right to construct and operate the Facility and sell

electricity generated by the Facility. Traditionally this

was a Concession Agreement (or Project Agreement)

with a relevant government entity granting the project

company a concession to build and operate the Facility

for a fixed period of time (usually between 15 and 25

years), after which it was handed back to the

government. This is why these projects are sometimes

referred to as Build Operate Transfer (“BOT”) or

Build Own Operate Transfer (“BOOT”) Projects.

However, following the deregulation of electricity

industries in many countries, merchant facilities are

now being planned and constructed. A merchant

power project is a project which sells electricity into

an electricity market and takes the market price for

that electricity. Merchant power projects do not

normally require an agreement between the project

company and a government entity to be constructed.

Instead, they need simply obtain the necessary

planning, environmental and building approvals. The

nature and extent of these approvals will vary from

place to place. In addition, the project company will





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need to obtain the necessary approvals and licences to

sell electricity into the market.

In traditional project financed power projects (as

opposed to merchant power projects) there is a Power

Purchase Agreement (“PPA”) between the project

company and the local government authority, where

the local government authority undertakes to pay for a

set amount of electricity every year of the concession,

subject to availability, regardless of whether it actually

takes that amount of electricity (referred to as a “take

or pay” obligation). The project company will in turn

undertake to produce a minimum quantity of

electricity and, in some circumstances, green products

(such as carbon or renewable energy credits).

Sometimes a Tolling Agreement is used instead of a

PPA. A Tolling Agreement is an agreement under

which the power purchaser directs how the plant is to

be operated and despatched. In addition, the power

purchaser is responsible for the provision of fuel. This

eliminates one risk variable for the project company

but also limits its operational flexibility.

In the absence of a PPA, project companies developing

a merchant power plant, and lenders, do not have the

same certainty of cash flow as they would if there was

a PPA. Therefore, merchant power projects are

generally considered higher risk than non-merchant

projects. This risk can be mitigated by entering into

hedge agreements. Project companies developing

merchant power projects often enter into synthetic

PPAs or hedge agreements to provide some certainty

of revenue. These agreements are financial hedges as

opposed to physical sales contracts. Their impact on

the EPC Contract is discussed in more detail below.

A Connection Agreement for connection of the

Facility generation equipment into the relevant

electricity distribution network (“Network”) between

the project company and the owner of the Network,

who will be either a transmission company, a

distribution company, an electrical utility or a small

grid owner/operator. The Connection Agreement will

broadly cover the construction and installation of

connection facilities by the owner of the Network and

the terms and conditions by which electricity is to be

delivered to the generation equipment at the Facility

from the Network (“import electricity”) and delivered

into the Network once generated by the Facility

(“export electricity”).

A construction contract governing various elements of

the construction of the Facility, from manufacture and

assembly of the key equipment to construction of the

balance of the plant comprising civil and electrical

works. There are a number of contractual approaches

that can be taken to construct a Facility. An EPC

Contract is one approach. Another option, as outlined

above, is to have a supply contract for key items of

equipment such as wind turbines, solar panels or hydro

turbines, a design agreement and construction contract

with or without a project management agreement. The

choice of contracting approach will depend on a

number of factors including the time available, the

lenders' requirements, and the identity of the

contractor(s). The major advantage of the EPC

Contract over the other possible approaches is that it

provides for a single point of responsibility. This is

discussed in more detail below.

Interestingly, on large project financed projects the

contractor is increasingly becoming one of the

sponsors - i.e. an equity participant in the project

company. Contractors will ordinarily sell down their

interest after financial close because, generally

speaking, contractors will not wish to tie up their

capital in operating projects. In addition, once

construction is complete the rationale for having the

contractor included in the ownership consortium no

longer exists. Similarly, once construction is complete

a project will normally be reviewed as lower risk than

a project in construction; therefore, all other things

being equal, the contractor should achieve a good

return on its investments.

In our experience most projects and almost all large,

private sector, facilities use an EPC Contract.

An agreement governing the operation and

maintenance of the facilities. This is usually a long-

term Operating and Maintenance Agreement (“O&M

Agreement”) with an operator for the operation and

maintenance of the Facility. The term of the O&M

Agreement will vary from project to project. The

operator will usually be a sponsor, especially if one of

the sponsors is an RE IPP or utility company whose

main business is operating facilities. Therefore, the

term of the O&M Agreement will likely match the

term of the Concession Agreement or the PPA. In

some financing structures the lenders will require the

project company itself to operate the Facility. In those

circumstances the O&M Contract will be replaced

with a Technical Services Agreement under which the

project company is supplied with the know how

necessary for its own employees to operate the

Facility. In other circumstances the project company

will enter into a fixed short term O&M Agreement





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with the manufacturer and supplier of the major

equipment supplied, for example, in the case of a wind

farm, the wind turbine generators, during which the

appointed operator will train the staff of the project

company. The project company will take over

operation of the Facility on expiry of the O&M

Agreement and will perform all functions of the

operator save for some support functions being

retained by the manufacturer.

Financing and security agreements with the lenders to

finance the development of the project.

Accordingly, the construction contract is only one of a

suite of documents relating to a Facility. Importantly, the

project company operates the project and earns revenues

under contracts other than the construction contract.

Therefore, the construction contract must, where practical,

be tailored so as to be consistent with the requirements of

the other project documents. As a result, it is vital to

properly manage the interfaces between the various types

of agreements. These interface issues are discussed in

more detail later.

BANKABILITY

A bankable contract is a contract with a risk allocation

between the contractor and the project company that

satisfies the lenders. Lenders focus on the ability (or more

particularly the lack thereof) of the contractor to claim

additional costs and/or extensions of time as well as the

security provided by the contractor for its performance.

The less comfortable the lenders are with these provisions

the greater amount of equity support the sponsors will

have to provide. In addition, lenders will have to be

satisfied as to the technical risk. Obviously price is also a

consideration but that is usually considered separately to

the bankability of the contract because the contract price

(or more accurately the capital cost of the Facility) goes

more directly to the bankability of the project as a whole.

Before examining the requirements for bankability it is

worth briefly considering the appropriate financing

structures and lending institutions. The most common

form of financing for infrastructure projects is project

financing. Project financing is a generic term that refers to

financing secured only by the assets of the project itself.

Therefore, the revenue generated by the project must be

sufficient to support the financing. Project financing is

also often referred to as either “non-recourse” financing or

“limited recourse” financing.

The terms “non-recourse” and “limited recourse” are often

used interchangeably, however, they mean different

things. “Non-recourse” means there is no recourse to the

project sponsors at all, whereas “limited recourse” means,

as the name suggests, there is limited recourse to the

sponsors. The recourse is limited both in terms of when it

can occur and how much the sponsors are forced to

contribute. In practice, true non-recourse financing is rare.

In most projects the sponsors will be obliged to contribute

additional equity in certain defined situations.

Traditionally project financing was provided by

commercial lenders. However, as projects became more

complex and financial markets more sophisticated, project

finance also developed. Whilst commercial lenders still

provide finance, governments now also provide financing

either through export credit agencies or trans or

multinational organisations like the World Bank, the

Asian Development Bank and European Bank for

Reconstruction and Development.

Development finance institutions (DFIs) such as DBSA

and IDC are involved many projects under the RE IPP

Programme as lenders or, in some cases, as financial

advisers or equity investors. More broadly, DFIs have a

general mandate to provide finance to the private sector

for investments that promote development, such as in the

form of higher risk loans, equity positions and risk

guarantee instruments to private sector investments in

developing countries.

In addition, as well as bank borrowings sponsors are also

using more sophisticated products like credit wrapped

bonds, securitisation of future cash flows and political risk

insurance to provide a portion of the necessary finance.

In assessing bankability lenders will look at a range of

factors and assess a contract as a whole. Therefore, in

isolation it is difficult to state whether one approach is or

is not bankable. However, generally speaking the lenders

will require the following:

a fixed completion date;

a fixed completion price;

no or limited technology risk;

output guarantees;

liquidated damages for both delay and performance;

security from the contractor and/or its parent;

large caps on liability (ideally, there would be no caps

on liability, however, given the nature of EPC

contracting and the risks to the contractors involved

there are almost always caps on liability); and

restrictions on the ability of the contractor to claim

extensions of time and additional costs.





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An EPC Contract delivers all of the requirements listed

above in one integrated package. This is one of the major

reasons why they are the predominant form of

construction contract used on large scale project financed

infrastructure projects.

Sponsor support

In certain cases, it may be necessary to provide sponsor

support to strengthen the capacity of the project company

to satisfy its obligations to the banks and to have a

"bankable" project. Forms of sponsor support may include

equity subscription agreements (base and standby equity),

completion guarantees of whole or part of the debt until

the project commences commercial operation, bank

guarantees to support completion guarantee, and cost

overrun guarantees. Completion guarantees, for example,

ensure that the lenders will be paid back a set amount if

the Facility does not reach completion or the repayment of

scheduled debt service, of principal plus interest, if

completion is delayed. Other forms of support may be

incorporated where the sponsor is a party to a key project

contract (such as a construction contract, operating and

maintenance agreement, or offtake agreement by requiring

the sponsor to provide additional guarantee letters of

credit or corporate support to underpin the project.

BASIC FEATURES OF AN EPC CONTRACT

The key clauses in any construction contract are those

which impact on:

time;

cost; and

quality.

The same is true of EPC Contracts. However, EPC

Contracts tend to deal with issues with greater

sophistication than other types of construction contracts.

This is because, as mentioned above, an EPC Contract is

designed to satisfy the lenders’ requirements for

bankability.

EPC Contracts provide for:

A single point of responsibility. The contractor is

responsible for all design, engineering, procurement,

construction, commissioning and testing activities.

Therefore, if any problems occur the project company

need only look to one party – the contractor – to both fix

the problem and provide compensation. As a result, if the

contractor is a consortium comprising several entities the

EPC Contract must state that those entities are jointly and

severally liable to the project company.

A fixed contract price. Risk of cost overruns and the

benefit of any cost savings are to the contractor’s account.

The contractor usually has a limited ability to claim

additional money which is limited to circumstances where

the project company has delayed the contractor or has

ordered variations to the works.

A fixed completion date. EPC Contracts include a

guaranteed completion date that is either a fixed date or a

fixed period after the commencement of the EPC

Contract. If completion does not occur before this date the

contractor is liable for delay liquidated damages

(“DLDs”). DLDs are designed to compensate the project

company for loss and damage suffered as a result of late

completion of the Facility. To be enforceable in common

law jurisdictions, DLDs must be a genuine pre-estimate of

the loss or damage that the project company will suffer if

the Facility is not completed by the target completion

date. The genuine pre-estimate is determined by reference

to the time the contract was entered into.

DLDs are usually expressed as a rate per day which

represents the estimated extra costs incurred (such as extra

insurance, supervision fees and financing charges) and

losses suffered (revenue forgone) for each day of delay.

In addition, the EPC Contract must provide for the

contractor to be granted an extension of time when it is

delayed by the acts or omissions of the project company.

The extension of time mechanism and reasons why it must

be included are discussed later.

Performance guarantees. The project company’s revenue

will be earned by operating the Facility. Therefore, it is

vital that the Facility performs as required in terms of

output and reliability. Therefore, EPC Contracts contain

performance guarantees backed by performance liquidated

damages (“PLDs”) payable by the contractor if it fails to

meet the performance guarantees. By way of example, for

a wind farm project the performance guarantees will

usually comprise a guaranteed power curve and an

availability guarantee guaranteeing the level of generation

of electricity.

PLDs must also be a genuine pre-estimate of the loss and

damage that the project company will suffer over the life

of the project if the Facility does not achieve the specified

performance guarantees. As with DLDs, the genuine pre-

estimate is determined by reference to the time the

contract was signed. PLDs are usually a net present value

(NPV) (less expenses) calculation of the revenue forgone

over the life of the project.

For example, if the output of the plant is 5 MW less than

the specification the PLDs are designed to compensate the





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project company for the revenue forgone over the life of

the project by being unable to sell that 5 MW.

PLDs and the performance guarantee regime and its

interface with the DLDs and the delay regime is discussed

in more detail below.

Caps on liability. As mentioned above most EPC

contractors will not, as a matter of company policy, enter

into contracts with unlimited liability. Therefore, EPC

Contracts for power projects cap the contractor’s liability

at a percentage of the contract price. This varies from

project to project, however, an overall liability cap of

100% of the contract price is common. In addition, there

are normally sub-caps on the contractor’s liquidated

damages liability. For example, DLDs and PLDs might

each be capped at 20% of the contract price with an

overall cap on both types of liquidated damages of 30% of

the contract price.

There will also likely be a prohibition on the claiming of

consequential damages. Put simply consequential

damages are those damages which do not flow directly

from a breach of contract but which were in the

reasonable contemplation of the parties at the time the

contract was entered into. This used to mean heads of

damage like loss of profit. However, loss of profit is now

usually recognised as a direct loss on project financed

projects and, therefore, would be recoverable under a

contract containing a standard exclusion of consequential

loss clause. Nonetheless, care should be taken to state

explicitly that liquidated damages can include elements of

consequential damages. Given the rate of liquidated

damages is pre-agreed most contractors will not object to

this exception.

In relation to both caps on liability and exclusion of

liability it is common for there to be some exceptions. The

exceptions may apply to either or both the cap on liability

and the prohibition on claiming consequential losses. The

exceptions themselves are often project specific, however,

some common examples include in cases of fraud or

wilful misconduct, in situations where the minimum

performance guarantees have not been met and the cap on

delay liquidated damages has been reached and breaches

of the intellectual property warranties.

Security. It is standard for the contractor to provide

performance security to protect the project company if the

contractor does not comply with its obligations under the

EPC Contract. The security takes a number of forms

including:

a bank guarantee for a percentage, normally in the

range of 5–15%, of the contract price. The actual

percentage will depend on a number of factors

including the other security available to the project

company, the payment schedule (because the greater

the percentage of the contract price unpaid by the

project company at the time it is most likely to draw

on security i.e., to satisfy DLD and PLD obligations

the smaller the bank guarantee can be), the identity of

the contractor and the risk of it not properly

performing its obligations, the price of the bank

guarantee and the extent of the technology risk;

retention i.e., withholding a percentage (usually 5%–

10%) of each payment. Provision is often made to

replace retention monies with a bank guarantee

(sometimes referred to as a retention guarantee (bond))

or to make the security package simpler the above

bank guarantee is generally used as a standalone

security for a value of 15% of the contract price;

advance payment guarantee, if an advance payment is

made; and

a parent company guarantee - this is a guarantee from

the ultimate parent (or other suitable related entity) of

the contractor which provides that it will perform the

contractor’s obligations if, for whatever reason, the

contractor does not perform.

Variations. The project company has the right to order

variations and agree to variations suggested by the

contractor. If the project company wants the right to omit

works either in their entirety or to be able to engage a

different contractor this must be stated specifically. In

addition, a properly drafted variations clause should make

provision for how the price of a variation is to be

determined. In the event the parties do not reach

agreement on the price of a variation the project company

or its representative should be able to determine the price.

This determination is subject to the dispute resolution

provisions. In addition, the variations clause should detail

how the impact, if any, on the performance guarantees is

to be treated. For some larger variations the project

company may also wish to receive additional security. If

so, this must also be dealt with in the variations clause.

Defects liability. The contractor is usually obliged to

repair defects that occur in the 12 to 24 months following

completion of the performance testing. Defects liability

clauses can be tiered. That is the clause can provide for

one period for the entire Facility and a second, extended

period, for more critical items, such as the wind turbine

blades or the solar panels. Refer also to the discussion

regarding serial defects in this paper above.





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Intellectual property. The contractor warrants that it has

rights to all the intellectual property used in the execution

of the works and indemnifies the project company if any

third parties’ intellectual property rights are infringed.

Force majeure. The parties are excused from performing

their obligations if a force majeure event occurs. This is

discussed in more detail below

Suspension. The project company usually has the right to

suspend the works.

Termination. This sets out the contractual termination

rights of both parties. The contractor usually has very

limited contractual termination rights. These rights are

limited to the right to terminate for non-payment or for

prolonged suspension or prolonged force majeure and will

be further limited by the tripartite or direct agreement

between the project company, the lenders and the

contractor. The project company will have more extensive

contractual termination rights. They will usually include

the ability to terminate immediately for certain major

breaches or if the contractor becomes insolvent and the

right to terminate after a cure period for other breaches. In

addition, the project company may have a right to

terminate for convenience. It is likely the project

company’s ability to exercise its termination rights will

also be limited by the terms of the financing agreements.

Performance specification. Unlike a traditional

construction contract, an EPC Contract usually contains a

performance specification. The performance specification

details the performance criteria that the contractor must

meet. However, it does not dictate how they must be met.

This is left to the contractor to determine. A delicate

balance must be maintained. The specification must be

detailed enough to ensure the project company knows

what it is contracting to receive but not so detailed that if

problems arise the contractor can argue they are not its

responsibility.

Whilst there are, as described above, numerous

advantages to using an EPC Contract, there are some

disadvantages. These include the fact that it can result in a

higher contract price than alternative contractual

structures. This higher price is a result of a number of

factors not least of which is the allocation of almost all the

construction risk to the contractor. This has a number of

consequences, one of which is that the contractor will

have to factor into its price the cost of absorbing those

risks. This will result in the contractor building

contingencies into the contract price for events that are

unforeseeable and/or unlikely to occur. If those

contingencies were not included the contract price would

be lower. However, the project company would bear more

of the risk of those unlikely or unforeseeable events.

Sponsors have to determine, in the context of their

particular project, whether the increased price is worth

paying.

As a result, sponsors and their advisers must critically

examine the risk allocation on every project. Risk

allocation should not be an automatic process. Instead, the

project company should allocate risk in a sophisticated

way that delivers the most efficient result. For example, if

a project is being undertaken in an area with unknown

geology and without the time to undertake a proper

geotechnical survey, the project company may be best

served by bearing the site condition risk itself as it will

mean the contractor does not have to price a contingency

it has no way of quantifying. This approach can lower the

risk premium paid by the project company. Alternatively,

the opposite may be true. The project company may wish

to pay for the contingency in return for passing off the risk

which quantifies and caps its exposure. This type of

analysis must be undertaken on all major risks prior to

going out to tender.

Another consequence of the risk allocation is the fact that

there are relatively few construction companies that can

and are willing to enter into EPC Contracts. As mentioned

in the Introduction some bad publicity and a tightening

insurance market have further reduced the pool of

potential EPC Contractors. The scarcity of EPC

Contractors can also result in relatively high contract

prices.

Another major disadvantage of an EPC Contract becomes

evident when problems occur during construction. In

return for receiving a guaranteed price and a guaranteed

completion date, the project company cedes most of the

day-to-day control over the construction. Therefore,

project companies have limited ability to intervene when

problems occur during construction. The more a project

company interferes the greater the likelihood of the

contractor claiming additional time and costs. In addition,

interference by the project company will make it

substantially easier for contractors to defeat claims for

liquidated damages and defective works.

Obviously, ensuring the project is completed satisfactorily

is usually more important than protecting the integrity of

the contractual structure. However, if a project company

interferes with the execution of the works they will, in

most circumstances, have the worst of both worlds. They

will have a contract that exposes them to liability for time

and costs incurred as a result of their interference without

any corresponding ability to hold the contractor liable for

delays in completion or defective performance. The same





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problems occur even where the EPC Contract is drafted to

give the project company the ability to intervene. In many

circumstances, regardless of the actual drafting, if the

project company becomes involved in determining how

the contractor executes the works then the contractor

executes the works then the contractor will be able to

argue that it is not liable for either delayed or defective

performance.

It is vitally important that great care is taken in selecting

the contractor and in ensuring the contractor has sufficient

knowledge and expertise to execute the works. Given the

significant monetary value of EPC Contracts, and the

potential adverse consequences if problems occur during

construction, the lowest price should not be the only factor

used when selecting contractors.

SPLIT EPC CONTRACTS

One common variation on the basic EPC structure

illustrated above is a split EPC Contract. Under a split

EPC Contract, the EPC Contract is, as the name implies,

split into two or more separate contracts.

The basic split structure involves splitting the EPC

Contract into an Onshore Construction Contract and an

Offshore Supply Contract.

There are two main reasons for using a split contract. The

first is that it can result in a lower contract price since it

allows the contractor to make savings in relation to

onshore taxes - in particular, on indirect and corporate

taxes in the onshore jurisdiction. The second is that it may

reduce the cost of complying with local licensing

regulations by having more of the works, particularly the

design works, undertaken offshore. In addition, in some

countries which impose restrictions on who can carry out

certain activities like engineering and design services,

splitting the EPC Contract can also be advantageous

because it can make it easier to repatriate profits.

However, a split EPC contractual structure can arise in

another context in renewable energy projects. For

example, in the case of wind farms, the manufacturers of

the wind turbines have successfully avoided taking the

turnkey responsibility by entering into a supply contract

and a balance of plant contract (i.e., the foundation works,

civils and erection etc.) instead of an EPC Contract.

There are risks to the project company in this structure.

This mainly arises because of the derogation from the

principle of single point of responsibility.

Unlike a standard EPC Contract, the project company

cannot look only to a single contractor to satisfy all the

contractual obligations (in particular, design, construction

and performance). Under a split structure, there are at

least two entities with those obligations. Therefore, a third

agreement, a coordination and interface agreement or

wrap-around guarantee, is often used to deliver a single

point of responsibility despite the split.

Under a wrap-around guarantee, an entity, usually either

the offshore supplier or the parent company of the

contracting entities, guarantees the obligations of both

contractors. This delivers a single point of responsibility

to the project company and the lenders. Where the

manufacturer of the turbines, panels etc and the balance of

plant contractor are separate entities, in many

circumstances neither company will be prepared take the

single point of responsibility for the performance of the

obligations of both contractors under the wrap-around

guarantee. Accordingly, the lenders will want to be

satisfied that the interface issues are dealt with in the

absence of a single point of responsibility.

To provide assurance to lenders that the risk of interface

and coordination issues arising between the two contracts

will be minimised, the contractors and the project

company should enter into a coordination and interface

agreement. In addition to setting out the general

coordination and interface arrangements relating to the

performance of the works, to minimise interface risk the

lenders will generally seek to ensure that the contractors

are jointly and severally liable in respect of the

performance of the 'coordination obligations' relating to

the project, which may include activities such as the

coordination of programmes, site access, document

provision, work handover and defect rectification.

KEY RENEWABLE ENERGY SPECIFIC

CLAUSES IN EPC CONTRACTS

General interface issues

As noted in the earlier section above, an EPC Contract is

one of a suite of agreements necessary to develop a

renewable energy Facility. Therefore, it is vital that the

EPC Contract properly interfaces with those other

agreements. In particular, care should be taken to ensure

the following issues interface properly:

commencement and completion dates;

liquidated damages amounts and trigger points;

caps on liability;

indemnities;

entitlements to extensions of time;

insurance;

force majeure; and





(October 2012)

intellectual property.

Interfacing of Commissioning and Testing Regimes

It is also important to ensure the commissioning and

testing regimes in the EPC Contract mirror the

requirements for commercial operation under the PPA.

Mismatches only result in delays, lost revenue and

liability for damages under the PPA or concession

agreement, all of which have the potential to cause

disputes.

Testing/trialling requirements under both contracts must

provide the necessary project company satisfaction under

the EPC Contract and system operator/offtaker

satisfaction under the PPA or Connection Agreement.

Relevant testing issues which must be considered include:

Are differing tests/trialling required under the EPC

Contract and the PPA and/or the Connection

Agreement? If so, are the differences manageable for

the project company or likely to cause significant

disruption?

Is there consistency between obtaining handover from

the Contractor under the EPC Contract and

commercial operation? It is imperative to prescribe

back to back testing under the relevant PPA and the

EPC Contract which will result in a smoother progress

of the testing and commissioning and better facilitate

all necessary supervision and certification. It must not

be forgotten that various certifications will be required

at the lender level. The last thing the lenders will want

is the process to be held up by their own requirements

for certification. To avoid delays and disruption it is

important that the lenders’ technical adviser is

acquainted with the details of the project and, in

particular, any potential difficulties with the testing

regime. Therefore, any potential problems can be

identified early and resolved without impacting on the

commercial operation of the Facility.

Is the basis of the testing to be undertaken mirrored

under both the EPC Contract and the PPA? For

example, in the context of wind, what basis are various

noise tests to be undertaken?

What measurement methodology is being used? Are

there references to international standards or

guidelines to a particular edition or version?

Are all tests necessary for the contractor to complete

under the EPC Contract able to be performed as a

matter of practice?

Significantly, if the relevant specifications are linked to

guidelines such as the relevant IEC standard,

consideration must be given to changes which may occur

in these guidelines. The EPC Contract reflects a snapshot

of the standards existing at a time when that contract was

signed. It may be a number of years post that date in

which the actual construction of the project is undertaken

thus allowing for possible mismatches should the relevant

standards guidelines have changed. It is important that

there is certainty as to which standard applies for both the

PPA and the EPC Contract. Is it the standard at the time of

entering the EPC Contract or is it the standard which

applies at the time of testing?

Consideration must therefore be given to the appropriate

mechanism to deal with potential mismatches between the

ongoing obligation of complying with laws, and the

contractor’s obligation to build to a specification agreed at

a previous time. Consideration must be given to requiring

the satisfaction of guidelines “as amended from time to

time”. The breadth of any change of law provision will be

at the forefront of any review.

The above issues raise the importance of the testing

schedules to the EPC Contract and the PPA. The size and

importance of the various projects to be undertaken must

mean that the days where schedules are attached at the last

minute without being subject to review are gone.

Discrepancies between the relevant testing and

commissioning requirements will only serve to delay and

distract all parties from the successful completion of

testing and reliability trials.

These are all areas where lawyers can add value to the

successful completion of projects by being alert to and

dealing with such issues at the contract formation stage.

We have included a sample testing schedule in

Appendix 2, which relates to wind projects under the RE

IPP Programme. Although the testing regime for a

particular project will be dependent on a range of factors,

such as the specific technology used, and will be heavily

scrutinised by the lenders' technical advisers, the sample

testing schedule illustrates the key matters and

considerations outlined above.

Interface issues - split contract structure

In some circumstances, a split contract structure may be

used to achieve a lower overall contract price than would

be achieved under an EPC Contract. For example, a

structure with a BOP Contract and an Equipment Supply

Contract may be used. However, if a split structure is

used, it is critical that a single point of responsibility is

provided. If not, the project company will be left with

interface risk which will impact on bankability.





(October 2012)

Matters that are critical to providing a single point of

responsibility are:

providing that no claim is available by the contractor

against the project company arising out of an act or

omission of any other contractor; and

preventing split contractors from having the ability to

make a claim on the project company due to the

default of one of the other contracting entities (e.g.

equipment supply contractor claiming against the

project company for a default caused by the balance of

plant contractor).

If a split contract structure is used, we recommend that the

following clauses be inserted to provide this mechanism:

No relief

[ ] Neither contractor 1 nor contractor 2 will be

entitled to payment of any sum from the project

company or to relief from any obligation to make

payment of any sum to the project company or be

entitled to relief from or reduction of any other

liability, obligation or duty arising out of or in

connection with the contracts including (without

limitation):

[ ].1 any extension of time;

[ ].2 any relief from liability for liquidated

damages;

[ ].3 any relief from liability for any other

damages;

[ ].4 any relief for deductions from payments;

[ ].5 any relief from liability to rectify defects;

[ ].6 any increase in the contract sum under the

contracts; or

[ ].7 payment of any costs incurred,

which arises out of or in connection with any act or

omission of the other, whether pursuant to or in

connection with any of the contracts or otherwise.

Horizontal defences

[ ] Contractor 1 and contractor 2 each waive any and

all rights, under contract, delict or otherwise at

law, to assert any and all defences which either

of contractor 1 or contractor 2 may have to a claim

by the project company for the non-performance,

inadequate performance or delay in performance

under their respective Contract due to any non-

performance or inadequate performance or delay

in performance by the other party under its

Contract.

Interface issues - contractor and operator are the

same or related entities

Similarly, as is the case in many projects under the RE

IPP Programme, where the contractor and the operator

under the O&M Contract are the same or related entities

ultimately controlled by the same parent company, rather

than a true 'arms-length' relationship, the EPC Contract

should include a mechanism that prevents the contractor

and operator from (i) relying on the delay or

underperformance of the other to obtain relief from the

project company under their respective contracts and (ii)

seeking to rely on the actions of the other as a defence to a

claim by the project company for delay or non-

performance. If not, this may impact on bankability.

These provisions can be included in the EPC Contract

itself (in which case back to back clauses should be

included in the O&M Contract) or otherwise in a separate

coordination and interface agreement that sets out the

coordination and interface obligations of the parties in

relation to the project.

In some cases, the contractor and the operator may seek to

argue that interface issues are minimal because, although

controlled by the same parent company, different entities

have been formed (including for the purpose of fulfilling

local ownership and participation requirements) to

perform the works and services under the two contracts.

The key issue for project companies and lenders is

whether the parties are controlled by the same parent

company. This is because, while it may ultimately be

unlikely, lenders may be concerned about the risk that

entities within the same corporate group may seek to

manipulate their obligations under the contract.

For example, consider the situation where the contractor

and the operator for a project are related entities. The

contractor has been delayed in achieving commercial

operation under the EPC Contract and delay liquidated

damages are accruing. The parent company of the

contractor and the operator may determine that the net

loss to the parent company in respect of the project will be

minimised if the delay is instead shifted to be the

responsibility of the operator under the O&M Contract,

for example, by the operator failing to provide staff to be

trained by the contractor in respect of the operation of the

Facility. The monetary amount of the liability of the

operator for failing to provide staff for training purposes

will in most cases be substantially lower than the rate of

delay liquidated damages being levied on the contractor,

due to the lower value of and lower caps on liability etc.

provided under the O&M Contract.





(October 2012)

To avoid this potential manipulation and shifting of risks

under the EPC and O&M Contracts, we recommend

including the horizontal defences and no relief clauses set

out above.

Interface issues between the Offtaker and the EPC

contractor

At a fundamental level, it is imperative that the

appropriate party corresponds with the relevant offtaker/

system operator during construction on issues such as the

provision of transmission or distribution facilities and the

relevant testing requirements and timing.

The project company must ensure the EPC Contract states

clearly that it is the appropriate party to correspond with

the offtaker and the system operator. Any uncertainty in

the EPC Contract may unfortunately see the EPC

contractor dealing with the offtaker and/or the system

operator thus possibly risking the relationship of the

project company with its customer. Significantly, it is the

project company which must develop and nurture an

ongoing and long term relationship with the offtaker. On

the other hand, it is the contractor’s prime objective to

complete the project on time or earlier at a cost which

provides it with significant profit. The clash of these

conflicting objectives in many cases does not allow for

such a smooth process. Again, the resolution of these

issues at the EPC Contract formation stage is imperative.

Interface issues on site access

Access to land for the siting of a Facility involves

negotiations with the landowner or the appropriate land

authority. More often than not, the co-existence of

components of the Facility such as wind turbines with

rural holdings will result in the project company entering

into access agreements with the landowners. The more

common arrangements will be land leases providing

possession and site access for the duration of the

construction and operation of the Facility. While the

leasing of land to renewable energy companies provides

long term income that complements farming income, the

substance of the land lease agreements with landowners is

the subject of much discussion and negotiation,

principally to ensure that the environmental and

development impact of the Facility is considered and

managed properly. Securing land rights for good

development sites may be difficult if there is community

opposition to these developments. Principal responsibility

for obtaining access to the site and negotiating the terms

of the lease agreements will lie with the project company.

However, in order for the project company to comply with

the terms of the land lease or other access agreements, the

project company will have to ensure that the contractor

under the EPC Contract complies with all the terms and

conditions of the land lease agreements. The contractor

must also accept some degree of responsibility for the

ongoing liaison and coordination with landowners during

the construction and operation of the Facility. Given that

considerations and concerns will often differ between

landowners, the specific requirements of the landowners

should be taken into account at an early stage in the

negotiation of the terms of the EPC Contract. Such

concerns will vary from prohibitions on the depth of

excavation to allow farming activity, to access agreements

for grazing and stock transportation.

The project company should only be required to provide

possession and access as permitted under the negotiated

land lease or site agreements, and the obligations of the

project company under the land lease or site agreements

should be flowed down into the EPC Contract. The

contractor should be appraised of the specific conditions

and requirements of the landowners to ensure that the

contractor is aware of the limits on access to the site on

which the Facility is to be constructed and operated. The

contractor must formally acknowledge the project

company’s obligation to comply with the terms of the land

lease or site agreements and must accept responsibility for

compliance with the terms of the land lease or site

agreements which are affected by the contractor’s design

and construction obligations under the EPC Contract.

Grid Access

EPC Contracts will generally only provide for the

handover of the Facility to the project company and the

effectiveness of the PPA once all commissioning and

reliability trialling has been successfully completed. This

raises the important issue of the contractor’s Grid Access

and the need for the EPC Contract to clearly define the

obligations of the project company in providing Grid

Access.

Lenders need to be able to avoid the situation where the

project company’s obligation to ensure Grid Access is

uncertain. This will result in protracted disputes with the

contractor concerning the contractor’s ability to place load

onto the grid system and to obtain extensions of time in

situations where delay has been caused as a result of the

failure or otherwise of the project company to provide

grid access.

Grid Access issues arise at two differing levels, namely:

(a) the obligation to ensure that the infrastructure is in

place; and





(October 2012)

(b) the obligation to ensure that the contractor is permitted

to export power.

With respect to the obligation to ensure that the

infrastructure is in place, the project company is the most

appropriate party to bear this risk vis-à-vis the contractor,

since the project company usually either builds the

infrastructure. Issues that must be considered include:

(a) what are the facilities that are to be constructed and

how will these facilities interface with the contractor’s

works? Is the construction of these facilities covered

by the PPA, connection agreement, concession

agreement or any other construction agreement? If so,

are the rights and obligations of the project company

dealt with in a consistent manner?

(b) what is the timing for completion of the infrastructure

– will it fit in with the timing under the EPC Contract?

With respect to the contractor’s ability to export power,

the EPC Contract must adequately deal with this risk and

satisfactorily answer the following questions to ensure the

smooth testing, commissioning and entering of

commercial operation:

(a) what is the extent of the Grid Access obligation? Is it

merely an obligation to ensure that the infrastructure

necessary for the export of power is in place or does it

involve a guarantee that the Grid will take all power

which the contractor wishes to produce?

(b) what is the timing for the commencement of this

obligation? Does the obligation cease at the relevant

target date of completion? If not, does its nature

change after the date has passed?

(c) what is the obligation of the project company to

provide grid access in cases where the Contractor’s

commissioning/plant is unreliable – is it merely a

reasonableness obligation?

(d) is the relevant Grid robust enough to allow for full

testing by the contractor - for example, the

performance of full load rejection testing?

(e) what is the impact of relevant national grid codes or

legislation and their interaction with both the EPC

Contract and the PPA?

Many EPC Contracts are silent on these matters or raise

far more questions than they actually answer. Given that

the project company’s failure will stem from restrictions

imposed on it under either or both the PPA or the

concession agreement, the best answer is to back to back

the project company’s obligations under the EPC Contract

(usually to provide an extension of time and / or costs)

with the PPA. This approach will not eliminate the risk

associated with Grid Access issues but will make it more

manageable.

A variety of projects we have worked have incurred

significant amounts of time and costs in determining the

Grid Access obligations under the EPC Contract. This

suggests that it is a matter which must be resolved at the

contract formation stage. Therefore, we recommend

inserting the clauses in Part III of Appendix 116

.

Serial defects

A 'serial defect' occurs where there is a repeated failure of

the same component or repeated failure from the same

root cause in a predetermined percentage of

commissioned equipment. The concept of serial defects is

particularly relevant to EPC Contracts where a large

number of units the same piece of equipment are to be

supplied (such as wind turbine generators).

For example, in relation to wind Facilities, a serial defect

can be defined as substantially the same defect having the

same root cause has been identified as a percentage of a

consignment (i.e. a consignment of wind turbine

generators of substantially the same size otherwise

delivered, or ready to be shipped, to the Site) of the wind

turbine generators delivered, or ready to be shipped, to the

site for incorporation into the Facility.

We suggest including a clause that provides that if a serial

defect is identified in a consignment of wind turbine

generators (notwithstanding that no such defect may have

been identified in any particular wind turbine generator),

any other wind turbine generators or consignment from

the same factory production lot as the consignment of

wind turbine generators in which the serial defect is

identified will be deemed to have the serial defect. If a

serial defect is identified, the project company should also

have the right to direct the contractor to replace a

particular wind turbine generators and/or consignment of

wind turbine generators.

Development and environmental considerations

The responsibility for the environmental issues

surrounding the construction and operation of the Facility

must be set out clearly in the EPC Contract. Renewable

energy projects have a range of environmental impacts

which need to be considered and managed properly. The

sponsor or project company will have to investigate if any

aspects of the project are likely to be subject to scrutiny

under the National Environmental Management Act 1998

(No. 107 of 1998) (“NEMA”) or other relevant legislation

and policy.

The type of environmental and other development impacts

that a renewable energy project may have will depend on





(October 2012)

a number of factors, including the technology being used,

the size of the project and where the project is sited.

Environmental and related impacts associated with

renewable energy projects generally include:

noise from the operation of the plant and/or

mechanical noise associated with noise from the

generator;

the impact on threatened species that inhabit the

nearby area, whose habitat or surrounding ecological

community may be impacted by the development;

effects on areas of high conservation and landscape

values, such as national and state parks and World

Heritage properties, which may limit or prevent

development;

effects on particular locations of high amenity or

tourist value, which may limit or prevent development;

the required clearance of native vegetation and

revegetation during construction;

construction issues such as the impact of construction

traffic and the construction of access road; and

archaeological and heritage issues including the

impact on cultural heritage values and sites of

significance to indigenous peoples.

There are also particular impacts associated with specific

technologies. Impacts particularly associated with wind

farms include:

concern for the visual impact of wind energy

development, which is usually a concern prior to

development;

the effect of shadow flicker and blade glint which must

be avoided or mitigated by design and siting;

noise from the swishing of the blades;

the impact on migratory species that may fly or move

through the wind farm area, even if they do not inhabit

the area, through collisions with turbines; and

potential electromagnetic interference with

microwave, television and radio signals.

Many of these issues will be most relevant at the stage of

seeking approval for the development of a Facility and

will be the responsibility of the sponsor or project

company. The list of development permits, approvals and

licences which must be obtained by the project company

should be clearly identified in the EPC Contract, with the

balance of construction permits and approvals being the

responsibility of the contractor. However, responsibility

for adherence to the conditions attached to the

development approvals, permits and the risks identified in

the environmental impact assessment, must be passed on

to the contractor. For instance, in the case of wind energy,

planning approvals for wind farms are generally subject to

permit conditions about noise limits. The contractor must

adhere to the required noise specifications and provide

warranties that the wind farm will comply with the noise

curves required by the specifications.

If the environmental assessment has identified areas of

ecological or archaeological importance, then these pre-

construction site conditions must be documented in the

EPC Contract and accepted by the contractor.

The contractor must also develop an environmental

management plan to identify risks, mitigation and

monitoring processes during construction of the Facility.

This should take into account factors such as erosion, dust

and sediment control, storage of hazardous materials,

weed control and waste management.

Independent certification of key equipment

The provision of design certificates or a statement of

compliance from an independent certifying body is

essential for the project company to ensure that critical

items of equipment (such as wind turbines ) provided by

the contractor have been designed in accordance with

industry standards and will fulfil the required design

parameters.

Certification of wind turbines has a history of almost 25

years. In recent years, other countries, as well as

financiers, have realised the necessity of a thorough

evaluation and certification of wind turbines and their

proposed installation. The certifications are commonly

divided into type certification and wind turbine

certification. The certification is usually required to be

carried out by an independent certifying body, such as

Germanischer Lloyd Industrial Services GmbH (an

international operating certification body for renewable

energy equipment, including wind turbines), and is

performed in accordance with that body’s rules or

regulations. Where possible, the certification should

encompass confirmation on the design life of the wind

turbines.

Wind turbine certification involves a complete third party

assessment and certification of specific wind turbines

from design assessment to commissioning, witnessing,

site assessment and periodic monitoring. Wind turbine

certification can only be carried out for type certified wind

turbines and on locations for which the necessary data is

available.

The project company may also require a site certification

to be provided by an independent certifying body





(October 2012)

confirming that the real site conditions of the wind farm as

a whole (including factors such a wind, climate,

topography and WTG layout) complies with the design

parameters of the relevant international standard. The real

climatic conditions of the relevant site will be provided to

the certifying body for assessment of factors such as the

wind conditions prevalent at the site as compared with

standard wind conditions and the calculation of loads for

the site conditions compared with the design basis.

Staged completion and handover to operator

For some types of renewable energy facilities, such as

wind, components of the Facility may be completed at

different times. As each wind turbine generator is usually

constructed sequentially, each wind turbine generator may

be taken over by the project company as it passes the

required tests on completion. While the taking over of

each wind turbine and associated equipment as and when

it is installed and commissioned is not unusual, it is

important to ensure that the issue of a Taking Over

Certificate for each individual component does not affect

the contractor’s obligations under the EPC Contract.

Issues such as the management of staggered defects

liability periods, the method of calculation of the

availability guarantees and the point at which performance

security held by the project company should be released

are among the important issues that must be considered

carefully by the project company when contemplating

staged taking over of components of the Facility.

Despite taking over individual wind turbine generators or

solar arrays, the performance security held by the project

company should only be reduced or released when the

relevant Facility has passed all tests required for

commercial operation of the entire Facility. Factors such

as the time period between taking over of each component

and the generation of electricity by components taken over

by the project company will influence the point at which it

is reasonable to reduce the performance security held by

the project company. If the operation and maintenance

obligations of an operator of the Facility commences on

the taking over of each component, the performance

security to be provided by the operator can be increased in

accordance with the number of components taken over.

The issue of a Taking Over Certificate for individual

components will also trigger commencement of the

defects liability period for that component. For example, if

a wind farm has between 20 and 25 wind turbines, this

could mean that the project company will have to

administer defects liability periods equivalent to the

number of wind turbines on the wind farm. If there is a

substantial gap between taking over of the first wind

turbine and the last wind turbine, this could also result in

the defects liability period for the first wind turbine

expiring substantially earlier than the last wind turbine

taken over and could affect the contractor’s defects

rectification or warranty obligations for defects affecting

the entire wind farm. The ideal position would be to

require the defects liability period to commence on taking

over of each wind turbine but to expire only from a set

time from taking over of the entire wind farm. If this

proves too onerous for the contractor, the wind turbine

generators could be divided into circuits of wind turbines,

for instance, 2 or 3 circuits of wind turbines each

comprising a separable portion. A taking over certificate

will therefore only be issued in relation to each circuit,

making it easier to administer the defects liability periods

or to manage other issues such as the reduction of

security.

The availability guarantee provided by the contractor in

each operating year of the Facility should ideally

commence from commercial operation of the entire

Facility and not from the time revenue is generated from

commercial operation of each component of the Facility.

However, as with the defects liability period, whether or

not this is acceptable to the contractor will depend on the

length of time during which the project company has

commenced generation of electricity from individual

components taken over prior to commercial operation of

the entire Facility. In some contracts, the availability

guarantee in the first operating year has been calculated

from the average date of completion of the individual

components.

Another important consideration is to ensure that the delay

liquidated damages imposed for failure to complete the

entire Facility by the required date for practical

completion takes into account any revenue that may be

generated by the project company from individual

components that are taken over and operated prior to

commercial operation of the entire Facility. This is to

ensure that the delay liquidated damages represent a

genuine pre-estimate of the project company’s loss.

As discussed in this paper above (under the heading 'Early

Operation and Staged Completion'), staged completion is

not available under the RE IPP Programme.

KEY PERFORMANCE CLAUSES IN

RENEWABLE ENERGY EPC CONTRACTS

Rationale for imposing liquidated damages

Almost every construction contract will impose liquidated

damages for delay and impose standards in relation to the

quality of construction. Most, however, do not impose





(October 2012)

PLDs. EPC Contracts impose PLDs because the

achievement of the performance guarantees has a

significant impact on the ultimate success of a project.

Similarly, it is important that the Facility commences

operation on time because of the impact on the success of

the project and because of the liability the project

company will have under other agreements. This is why

DLDs are imposed. DLDs and PLDs are both ‘sticks’ used

to motivate the contractor to fulfil its contractual

obligations.

The law of liquidated damages

As discussed above, liquidated damages must be a

genuine pre-estimate of the project company’s loss. If

liquidated damages are more than a genuine pre-estimate

they will be a penalty under South African law. This

penalty is capable of being enforced, but may be reduced

by a court at its discretion where it considers that clause to

be out of proportion to the prejudice suffered by the

project company. The court can reduce the penalty to such

extent as it deems equitable in the circumstances. . There

is no legal sanction for setting a liquidated damages rate

below that of a genuine pre-estimate, however, there are

the obvious financial consequences.

In addition, liquidated damages can also be void for

uncertainty or unenforceable because they breach the

prevention principle. Void for uncertainty means, as the

term suggests, that it is not possible to determine how the

liquidated damages provisions work. In those

circumstances, a court will void the liquidated damages

provisions.

The prevention principle was developed by the courts to

prevent employers i.e. project companies from delaying

contractors and then claiming DLDs. It is discussed in

more detail below in the context of extensions of time.

Prior to discussing the correct drafting of liquidated

damages clauses to ensure they are not void or

unenforceable it is worth considering the consequences of

an invalid liquidated damages regime. If the EPC Contract

contains an exclusive remedies clause the result is simple

– the contractor will have escaped liability unless the

contract contains an explicit right to claim damages at law

if the liquidated damages regime fails. This is discussed in

more detail below.

If, however, the EPC Contract does not contain an

exclusive remedies clause the non-challenging party

should be able to claim at law for damages they have

suffered as a result of the challenging party’s non or

defective performance. What then is the impact of the

caps in the now invalidated liquidated damages clauses?

Unfortunately, the position is unclear in common law

jurisdictions, and a definitive answer cannot be provided

based upon the current state of authority. It appears the

answer varies depending upon whether the clause is

invalidated due to its character as a penalty, or because of

uncertainty or unenforceability. Our view of the current

position is set out below. We note that whilst the legal

position is not settled the position presented below does

appear logical.

Clause invalidated as a penalty

When liquidated damages are invalidated because they

are a penalty (i.e., they do not represent a genuine pre-

estimate of loss), the liquidated damages or its cap will

not act as a cap on damages claims at general law.

We note that it is rare for a court to find liquidated

damages are penalties in contracts between two

sophisticated, well advised parties.

Clause invalidated due to acts of prevention by the

principal

A liquidated damages clause will cap the contractor’s

liability where a liquidated damages regime breaches

the prevention principle because this gives effect to the

commercial bargain struck by the parties.

Clause void for uncertainty

A liquidated damages clause which is uncertain is

severed from the EPC Contract in its entirety, and will

not act as a cap on the damages recoverable by the

principal from the contractor. Upon severance, the

clause is, for the purposes of contractual interpretation,

ignored.

However, it should be noted that the threshold test for

rendering a clause void for uncertainty is high, and

courts are reluctant to hold that the terms of a contract,

in particular a commercial contract where performance

is well advanced, are uncertain

Drafting of liquidated damages clauses

Given the role liquidated damages play in ensuring EPC

Contracts are bankable, and the consequences detailed

above of the regime not being effective, it is vital to

ensure that liquidated damages clauses are properly

drafted to ensure contractors cannot avoid their liquidated

damages liability on a legal technicality.

Therefore, it is important, from a legal perspective, to

ensure DLDs and PLDs are dealt with separately. If a

combined liquidated damages amount is levied for late

completion of the works, it risks being struck out as a

penalty because it will overcompensate the project

company. However, a combined liquidated damages





(October 2012)

amount levied for underperformance may under

compensate the project company.

Our experience shows that there is a greater likelihood of

delayed completion than there is of permanent

underperformance. One of the reasons why projects are

not completed on time is that contractors are often faced

with remedying performance problems. This means, from

a legal perspective, if there is a combination of DLDs and

PLDs, the liquidated damages rate should include more of

the characteristics of DLDs to protect against the risk of

the liquidated damages being found to be a penalty.

If a combined liquidated damages amount includes a NPV

or performance element the contractor will be able to

argue that the liquidated damages are not a genuine pre-

estimate of loss when liquidated damages are levied for

late completion only. However, if the combined liquidated

damages calculation takes on more of the characteristics

of DLDs the project company will not be properly

compensated if there is permanent underperformance.

It is also important to differentiate between the different

types of PLDs to protect the project company against

arguments by the contractor that the PLDs constitute a

penalty. For example, if a single PLDs rate is only focused

on availability and not efficiency, problems and

uncertainties will arise if the availability guarantee is met

but one or more of the efficiency guarantees are not. In

these circumstances, the contractor will argue that the

PLDs constitute a penalty because the loss the project

company suffers if the efficiency guarantees are not met

are usually smaller than if the availability guarantees are

not met.

Drafting of the performance guarantee regime

Now that it is clear that DLDs and PLDs must be dealt

with separately it is worth considering, in more detail,

how the performance guarantee regime should operate. A

properly drafted performance testing and guarantee

regime is important because the success or failure of the

project depends, all other things being equal, on the

performance of the Facility.

The major elements of the performance regime are:

testing;

guarantees; and

liquidated damages.

Liquidated damages were discussed above. Testing and

guarantees are discussed below. In addition, a sample

testing, guarantee and liquidated damages framework in

respect of a wind Facility in the context of the RE IPP

Programme is set out in Appendix 2 of this paper.

Testing

Performance tests may cover a range of areas. Three of

the most common are:

Functional tests – these test the functionality of certain

parts of the key components of a Facility, such as, in the

case of wind facilities, wind turbine generators, SCADA

systems, power collection systems and meteorological

masts. These are usually discrete tests which do not test

the Facility as a whole. Liquidated damages do not

normally attach to these tests. Instead, they are absolute

obligations that must be complied with. If they are not

complied with, the Facility will not reach the next stage of

completion (for example, mechanical completion or

provisional acceptance).

Guarantee tests – these test the ability of the Facility to

meet the performance criteria specified in the contract.

Given that the performance guarantees will differ by

technology, so will the relevant guarantee tests. For

example, in the case of wind technology, a power curve

test will generally be conducted, in addition to an acoustic

emissions test . A sample testing framework for a wind

Facility in the context of the RE IPP Programme is set out

in Appendix 2 of this paper.

The consequence of failure to meet these performance

guarantees is normally the payment of PLDs. If minimum

performance guarantees are provided, satisfaction of these

minimum guarantees is generally an absolute obligation.

In some cases, if minimum performance guarantees are

not met the project company will have a right to terminate

the EPC Contract and to reject the Facility and (in some

circumstances) require the contractor to repay all amounts

paid to it in respect of the Facility and dismantle and

remove the Facility at its own cost and restore the site to

its original condition.

The performance guarantees should be set at a level of

performance at which it is economic to accept the Facility.

Lender’s input will be vital in determining what this level

is. However, it must be remembered that lenders have

different interests to the sponsors. Lenders will, generally

speaking, be prepared to accept a Facility that provides

sufficient income to service the debt. However, in addition

to covering the debt service obligations, sponsors will also

want to receive a return on their equity investment. If that

will not be provided via the sale of electricity because the

contractor has not met the performance guarantees, the

sponsors will have to rely on the PLDs to earn their return.

In some projects, the guarantee tests occur after hand over

of the Facility to the project company. This means the





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contractor no longer has any liability for DLDs during

performance testing.

In our view, it is preferable, especially in project financed

projects, for handover to occur after completion of

performance testing. This means the contractor continues

to be liable for DLDs until either the Facility achieves the

guaranteed level or the contractor pays PLDs where the

Facility does not operate at the guaranteed level.

Obviously, DLDs will be capped (usually at 20% of the

Contract Price) therefore, the EPC Contract should give

the project company the right to call for the payment of

the PLDs and accept the Facility. If the project company

does not have this right the problem mentioned above will

arise, namely, the project company will not have received

its Facility and will not be receiving any DLDs as

compensation.

It is often the case in renewable energy projects that the

contractor or operator of a Facility will not accept liability

for availability PLDs beyond a limited period. In a power

plant, the PLDs are calculated to enable the project

company to recover the amount it will lose over the life of

the power plant in the event the guarantees are not

satisfied. The PLDs on a power plant are usually

calculated using the NPV of the project company's loss

based on the life of the plant. For example, on wind farm

projects, the contractor will pay power curve PLDs but

will often not accept responsibility for availability PLDs

beyond the warranty period or in the case of the operator,

the term of the operating and maintenance agreement. The

contractor or operator, as the case may be, will simply pay

the yearly availability PLDs for failing to meet the

stipulated availability guarantee over the warranty period

specified in the contract or for the period during which the

operator has control over the operation and maintenance

of the Facility.

It is common for the contractor to be given an opportunity

to modify the Facility if the Facility does not meet the

performance guarantees on the first attempt. This is

because the PLD amounts are normally very large and

most contractors would prefer to spend the time and the

money necessary to remedy performance instead of

paying PLDs. Not giving contractors this opportunity will

likely lead to an increased contract price both because

contractors will build a contingency for paying PLDs into

the contract price and because in most circumstances the

project company will prefer to receive a Facility that

achieves the required performance guarantees. The right

to modify and retest is another reason why DLDs should

be payable up to the time the performance guarantees are

satisfied.

If the contractor is to be given an opportunity to modify

and retest the EPC Contract must deal with the question of

who bears the costs required to undertake the retesting.

The cost of the performance of a power curve test in

particular can be significant and should, in normal

circumstances, be to the contractor’s account because the

retesting only occurs if the performance guarantees are not

met at the first attempt.

Technical issues

Ideally, the technical testing procedures should be set out

in the EPC Contract. However, for a number of reasons,

including the fact that it is often not possible to fully

scope the testing program until the detailed design is

complete, the testing procedures are usually left to be

agreed during construction by the contractor, the project

company’s representative or engineer and, if relevant, the

lenders’ technical adviser. However, a properly drafted

EPC Contract should include the guidelines for testing.

The complete testing procedures must, as a minimum, set

out details of:

Testing methodology – reference is often made to

standard methodologies, for example, the IEC 61-400

methodology.

Testing equipment – who is to provide it, where it is

to be located, how sensitive must it be.

Tolerances – what is the margin of error. For instance

excluding wind conditions in excess of specified

speeds or excluding solar radiation in excess of certain

levels.

Ambient conditions – what atmospheric conditions

are assumed to be the base case (testing results will

need to be adjusted to take into account any variance

from these ambient conditions).

In addition, for renewable energy facilities with a number

of components, such as wind farms with multiple wind

turbine generators , the testing procedures must state those

tests to be carried out on a per turbine or per solar array

basis and those to be carried out on an average basis.

An example of the way a performance testing and

liquidated damages regime can operate is best illustrated

diagrammatically. Refer to the flowchart in Appendix 3

for an example of how the various parts of the

performance testing regime should interface in the context

of wind farms.

Long term performance guarantees

The project company should be aware that guarantee tests

are only a snapshot of the Facility's capacity and





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reliability, and the long-term capabilities of the Facility

under varying conditions remain unproven.

The project company may wish to incorporate long-term

performance guarantees from the Contractor into the EPC

Contract to cover this. These performance guarantees may

operate past the hand-over of the Facility to the project

company or operator and up to the expiry of the defects

liability period. Such guarantees can include guaranteed

generated output in MWh per year. In general, contractors

will not wish to enter into such long-term performance

guarantees. As an inducement, the project company may

offer performance bonuses for where guaranteed

generated output is exceeded.

KEY GENERAL CLAUSES IN EPC CONTRACTS

Delay and Extensions of Time

The Prevention Principle

As noted previously, one of the advantages of an EPC

Contract is that it provides the project company with a

fixed completion date. If the contractor fails to complete

the works by the required date they are liable for DLDs.

However, in some circumstances the contractor is entitled

to an extension of the date for completion. Failure to grant

an extension for a project company caused delay can void

the liquidated damages regime and ‘set time at large’. This

means the contractor is only obliged to complete the

works within a reasonable time.

This is the situation under common law governed

contracts due to the prevention principle. The prevention

principle was developed by the courts to prevent

employers i.e.: project companies from delaying

contractors and then claiming DLDs.

The legal basis of the prevention principle is unclear and it

is uncertain whether you can contract out of the

prevention principle. Logically, given most commentators

believe the prevention principle is an equitable principle,

explicit words in a contract should be able to override the

principle. However, the courts have tended to apply the

prevention principle even in circumstances where it would

not, on the face of it, appear to apply. Therefore, there is a

certain amount of risk involved in trying to contract out of

the prevention principle. The more prudent and common

approach is to accept the existence of the prevention

principle and provide for it the EPC Contract.

The contractor’s entitlement to an extension of time is not

absolute. It is possible to limit the contractor’s rights and

impose pre-conditions on the ability of the contractor to

claim an extension of time. A relatively standard

extension of time (“EOT”) clause would entitle the

contractor to an EOT for:

an act, omission, breach or default of the project

company;

suspension of the works by the project company

(except where the suspension is due to an act or

omission of the contractor);

a variation (except where the variation is due to an act

or omission of the contractor); and

force majeure,

which cause a delay on the critical path and about which

the contractor has given notice within the period specified

in the contract. It is permissible (and advisable) from the

project company’s perspective to make both the necessity

for the delay to impact the critical path and the obligation

to give notice of a claim for an extension of time

conditions precedent to the contractor’s entitlement to

receive an EOT. In addition, it is usually good practice to

include a general right for the project company to grant an

EOT at any time. However, this type of provision must be

carefully drafted because some judges have held

(especially when the project company’s representative is

an independent third party) the inclusion of this clause

imposes a mandatory obligation on the project company to

grant an extension of time whenever it is fair and

reasonable to do so, regardless of the strict contractual

requirements. Accordingly, from the project company’s

perspective it must be made clear that the project

company has complete and absolute discretion to grant an

EOT, and that it is not required to exercise its discretion

for the benefit of the Contractor.

Similarly, following some recent common law decisions,

the contractor should warrant that it will comply with the

notice provisions that are conditions precedent to its right

to be granted an EOT.

We recommend using the relevant clauses provided in

Appendix 1.

Concurrent Delay

You will note that in the suggested EOT clause, one of the

subclauses refers to concurrent delays. This is relatively

unusual because most EPC Contracts are silent on this

issue. For the reasons explained below we do not agree

with that approach.

A concurrent delay occurs when two or more causes of

delay overlap. It is important to note that it is the

overlapping of the causes of the delays not the

overlapping of the delays themselves. In our experience,

this distinction is often not made. This leads to confusion





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and sometimes disputes. More problematic is when the

contract is silent on the issue of concurrent delay and the

parties assume the silence operates to their benefit. As a

result of conflicting case law it is difficult to determine

who, in a particular fact scenario, is correct. This can also

lead to protracted disputes and outcomes contrary to the

intention of the parties.

There are a number of different causes of delay which

may overlap with delay caused by the contractor. The

most obvious causes are the acts or omissions of a project

company.

A project company often has obligations to provide

certain materials or infrastructure to enable the contractor

to complete the works. The timing for the provision of

that material or infrastructure (and the consequences for

failing to provide it) can be affected by a concurrent

delay.

For example, the project company is usually obliged, as

between the project company and the contractor, to

provide a transmission line to connect to the Facility by

the time the contractor is ready to commission the

Facility. Given the construction of the transmission line

can be expensive, the project company is likely to want to

incur that expense as close as possible to the date

commissioning is due to commence. For this reason, if the

contractor is in delay the project company is likely to

further delay incurring the expense of building the

transmission line. In the absence of a concurrent delay

clause, this action by the project company, in response to

the contractor’s delay, could entitle the contractor to an

extension of time.

Concurrent delay is dealt with differently in the various

international standard forms of contract. Accordingly, it is

not possible to argue that one approach is definitely right

and one is definitely wrong. In fact, the ‘right’ approach

will depend on which side of the table you are sitting.

In general, there are three main approaches for dealing

with the issue of concurrent delay. These are:

Option One – the contractor has no entitlement to an

extension of time if a concurrent delay occurs.

Option Two – the contractor has an entitlement to an

extension of time if a concurrent delay occurs.

Option Three – the causes of delay are apportioned

between the parties and the contractor receives an

extension of time equal to the apportionment. For

example, if the causes of a 10-day-delay are

apportioned 60:40 project company : contractor, the

contractor would receive a 6 day extension of time.

Each of these approaches is discussed in more detail

below.

(i) Option One: Contractor not entitled to an extension of

time for concurrent delays.

A common, project company friendly, concurrent

delay clause for this option one is:

“If more than one event causes concurrent delays and

the cause of at least one of those events, but not all of

them, is a cause of delay which would not entitle the

Contractor to an extension of time under [EOT

Clause], then to the extent of the concurrency, the

Contractor will not be entitled to an extension of

time.”

The most relevant words are bolded.

Nothing in the clause prevents the contractor from

claiming an extension of time under the general

extension of time clause. What the clause does do is to

remove the contractor’s entitlement to an extension of

time when there are two or more causes of delay and at

least one of those causes would not entitle the

contractor to an extension of time under the general

extension of time clause.

For example, if the contractor’s personnel were on

strike and during that strike the project company failed

to approve drawings, in accordance with the

contractual procedures, the contractor would not be

entitled to an extension of time for the delay caused by

the project company’s failure to approve the drawings.

The operation of this clause is best illustrated

diagrammatically.

Example 1: Contractor not entitled to an extension of

time for project company caused delay

In this example, the contractor would not be entitled to

any extension of time because the Contractor Delay 2

overlaps entirely with the Project Company Delay.

Therefore, using the example clause above, the

contractor is not entitled to an extension of time to the

extent of the concurrency. As a result, at the end of the

Contractor Delay 2 the contractor would be in 8 weeks

delay (assuming the contractor has not, at its own cost

and expense accelerated the Works).





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Example 2: Contractor entitled to an extension of time

for project company caused delay

In this example, there is no overlap between the

contractor and Project Company Delay Events. The

contractor would be entitled to a two week extension

of time for the project company delay. Therefore, at

the end of the Project Company Delay the contractor

will remain in six weeks delay, assuming no

acceleration.

Example 3: Contractor entitled to an extension of time

for a portion of the project company caused delay

In this example, the contractor would be entitled to a

one week extension of time because the delays overlap

for one week. Therefore, the contractor is entitled to an

extension of time for the period when they do not

overlap i.e., when the extent of the concurrency is

zero. As a result, after receiving the one week

extension of time, the contractor would be in seven

weeks delay, assuming no acceleration.

From a project company’s perspective, we believe, this

option is both logical and fair. For example, if, in

example 2 the Project Company Delay was a delay in

the approval of drawings and the Contractor Delay

was the entire workforce being on strike, what logic is

there in the contractor receiving an extension of time?

The delay in approving drawings does not actually

delay the works because the contractor could not have

used the drawings given its workforce was on strike.

In this example, the contractor would suffer no

detriment from not receiving an extension of time.

However, if the contractor did receive an extension of

time it would effectively receive a windfall gain.

The greater number of obligations the project company

has the more reluctant the contractor will likely be to

accept option one. Therefore, it may not be appropriate

for all projects.

(ii) Option Two: Contractor entitled to an extension of

time for concurrent delays

Option two is the opposite of option one and is the

position in many of the contractor friendly standard

forms of contract. These contracts also commonly

include extension of time provisions to the effect that

the contractor is entitled to an extension of time for

any cause beyond its reasonable control which, in

effect, means there is no need for a concurrent delay

clause.

The suitability of this option will obviously depend on

which side of the table you are sitting. This option is

less common than option one but is nonetheless

sometimes adopted. It is especially common when the

contractor has a superior bargaining position.

(iii) Option Three: Responsibility for concurrent delays is

apportioned between the parties

Option three is a middle ground position that has been

adopted in some of the standard form contracts. For

example, some standard construction contracts adopt

the apportionment approach. For example:

“Assessment

When both non qualifying and qualifying causes of

delay overlap, the Superintendent shall apportion the

resulting delay to WUC according to the respective

causes’ contribution.

In assessing each EOT the Superintendent shall

disregard questions of whether:

a) WUC can nevertheless reach practical completion

without an EOT; or

b) the Contractor can accelerate, but shall have

regard to what prevention and mitigation of the delay

has not been effected by the Contractor.”

We appreciate the intention behind the example clause

and the desire for both parties to share responsibility for

the delays they cause. However, we have some concerns

about this clause and the practicality of the apportionment

approach in general. It is easiest to demonstrate our

concerns with an extreme example. For example, what if

the qualifying cause of delay was the project company’s

inability to provide access to the site and the non-

qualifying cause of delay was the contractor’s inability to

commence the works because it had been black banned by

trade unions. How should the causes be apportioned? In

this example, the two causes are both 100% responsible

for the delay.

In our view, an example like the above where both parties

are at fault has two possible outcomes. Either:





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the delay is split down the middle and the contractor

receives 50% of the delay as an extension of time; or

the delay is apportioned 100% to the project company

and therefore the contractor receives 100% of the time

claimed. The delay is unlikely to be apportioned 100%

to the contractor because a judge or arbitrator will

likely feel that that is ‘unfair’, especially if there is a

potential for significant liquidated damages liability.

In addition, option three is only likely to be suitable if the

party undertaking the apportionment is independent from

both the project company and the contractor.

Exclusive remedies and fail safe clauses

It is common for contractors to request the inclusion of an

exclusive remedies clause in an EPC Contract. However,

from the perspective of a project company, the danger of

an exclusive remedies clause is that it prevents the project

company from recovering any type of damages not

specifically provided for in the EPC Contract.

An EPC Contract is conclusive evidence of the agreement

between the parties to that contract. If a party clearly and

unambiguously agrees that their only remedies are those

within the EPC Contract, they will be bound by those

terms. However, the courts have been reluctant to come to

this conclusion without clear evidence of an intention of

the parties to the EPC Contract to contract out of their

legal rights. This means if the common law right to sue for

breach of EPC Contract is to be contractually removed, it

must be done by very clear words.

Contractor’s perspective

The main reason for a contractor insisting on a project

company being subject to an exclusive remedies clause is

to have certainty about its potential liabilities. The

preferred position for a contractor will be to confine its

liabilities to what is specified in the EPC Contract. For

example, an agreed rate of liquidated damages for delay

and, where relevant, underperformance of the Facility. A

contractor will also generally require the amount of

liquidated damages to be subject to a cap and for the EPC

Contract to include an overall cap on its liability.

Project company’s perspective

The preferred position for a project company is for it not

to be subject to an exclusive remedies clause. An

exclusive remedies clause limits the project company’s

right to recover for any failure of the contractor to fulfil its

contractual obligations to those remedies specified in the

EPC Contract. For this reason, an exclusive remedies

clause is an illogical clause to include in an EPC Contract

from the perspective of a project company because it

means that the project company has to draft a remedy or

exception for each obligation - this represents an absurd

drafting position. For example, take the situation where

the EPC Contract does not have any provision for the

recovery of damages other than liquidated damages. In

this case, if the contractor has either paid the maximum

amount of liquidated damages or delivered the Facility in

a manner that does not require the payment of liquidated

damages (i.e., it is delivered on time and performs to

specification) but subsequent to that delivery the project

company is found to have a claim, say for defective

design which manifests itself after completion, the project

company will have no entitlement to recover any form of

damages as any remedy for latent defects has been

excluded.

The problem is exacerbated because most claims made by

a project company will in some way relate to performance

of the Facility and PLDs were expressed to be the

exclusive remedy for any failure of the Facility to perform

in the required manner. For example, any determination as

to whether the Facility is fit for purpose will necessarily

depend on the level and standard of the performance of

the Facility. In addition to claims relating to fitness for

purpose, a project company may also wish to make claims

for, amongst other things, breach of contract, breach of

warranty or negligence. The most significant risk for a

project company in an EPC Contract is where there is an

exclusive remedies clause and the only remedies for delay

and underperformance are liquidated damages. If, for

whatever reason, the liquidated damages regimes are held

to be invalid, the project company would have no recourse

against the contractor as it would be prevented from

recovering general damages at law, and the contractor

would escape liability for late delivery and

underperformance of the Facility.

Fail Safe Clauses

In contracts containing an exclusive remedies clause, the

project company must ensure all necessary exceptions are

expressly included in the EPC Contract. In addition,

drafting must be included to allow the project company to

recover general damages at law for delay and

underperformance if the liquidated damages regimes in

the EPC Contract are held to be invalid. To protect the

position of a project company (if liquidated damages are

found for any reason to be unenforceable and there is an

exclusive remedies clause), we recommend the following

clauses be included in the EPC Contract:

“[ ].1 If clause [delay liquidated damages] is found

for any reason to be void, invalid or otherwise

inoperative so as to disentitle the Project company





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from claiming Delay Liquidated Damages, the Project

company is entitled to claim against the Contractor

damages at law for the Contractor’s failure to

complete the Works by the Date for Practical

Completion.

[ ].2 If [ ].1 applies, the damages claimed by the

Project company must not exceed the amount specified

in Item [ ] of Appendix [ ] for any one day of delay

and in aggregate must not exceed the percentage of

the EPC Contract Price specified in Item [ ] of

Appendix [ ].”

These clauses (which would also apply to PLDs) mean

that if liquidated damages are held to be unenforceable for

any reason the project company will not be prevented

from recovering general damages at law. However, the

amount of damages recoverable at law may be limited to

the amount of liquidated damages that would have been

recoverable by the project company under the EPC

Contract if the liquidated damages regime had not been

held to be invalid (see discussion above). For this reason,

the suggested drafting should be commercially acceptable

to a contractor as its liability for delay and

underperformance will be the same as originally

contemplated by the parties at the time of entering into the

EPC Contract.

In addition, if the EPC Contract excludes the parties rights

to claim their consequential or indirect losses, these

clauses should be an exception to that exclusion. The

rationale being that the rates of liquidated damages are

likely to include an element of consequential or indirect

losses.

Force Majeure

What is force majeure?

Force majeure clauses are almost always included in EPC

Contracts. However, they are rarely given much thought

unless and until one or more parties seek to rely on them.

Generally, the assumption appears to be that “the risk will

not affect us” or “the force majeure clause is a legal

necessity and does not impact on our risk allocation under

the contract”. Both of these assumptions are inherently

dangerous, and, particularly in the second case, incorrect.

Therefore, especially in the current global environment, it

is appropriate to examine their application.

Force majeure is a civil law concept that has no real

meaning under the common law. However, force majeure

clauses are used in contracts because the only similar

common law concept – the doctrine of frustration -is of

limited application. For that doctrine to apply the

performance of a contract must be radically different from

what was intended by the parties. In addition, even if the

doctrine does apply, the consequences are unlikely to be

those contemplated by the parties.

Given force majeure clauses are creatures of contract their

interpretation will be governed by the normal rules of

contractual construction. Force majeure provisions will be

construed strictly and in the event of any ambiguity the

contra proferentem rule will apply. Contra proferentem

literally means “against the party putting forward”. In this

context, it means that the clause will be interpreted against

the interests of the party that drafted it and is seeking to

rely on it. The parties may contract out of this rule.

The rule of ejusdem generis which literally means “of the

same class” may also be relevant. In other words, when

general wording follows a specific list of events, the

general wording will be interpreted in light of the specific

list of events. In this context it means that when a broad

‘catch-all’ phrase, such as ‘anything beyond the

reasonable control of the parties’, follows a list of more

specific force majeure events the catch all phrase will be

limited to events analogous to the listed events.

Importantly, parties cannot invoke a force majeure clause

if they are relying on their own acts or omissions.

The underlying test in relation to most force majeure

provisions is whether a particular event was within the

contemplation of the parties when they made the contract.

The event must also have been outside the control of the

contracting party. There are generally three essential

elements to force majeure:

it can occur with or without human intervention;

it cannot have reasonably been foreseen by the parties;

and

it was completely beyond the parties’ control and they

could not have prevented its consequences.

Given the relative uncertainty surrounding the meaning of

force majeure we favour explicitly defining what the

parties mean. This takes the matter out of the hands of the

courts and gives control back to the parties. Therefore, it

is appropriate to consider how force majeure risk should

be allocated.

Drafting force majeure clauses

The appropriate allocation of risk in project agreements is

fundamental to negotiations between the project company

and its contractors. Risks generally fall into the following

categories:

risks within the control of the project company;

risks within the control of the contractor; and





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risks outside the control of both parties.

The negotiation of the allocation of many of the risks

beyond the control of the parties, for example, latent site

conditions and change of law, is usually very detailed so

that it is clear which risks are borne by the contractor. The

same approach should be adopted in relation to the risks

arising from events of force majeure.

There are 2 aspects to the operation of force majeure

clauses:

the definition of force majeure events; and

the operative clause that sets out the effect on the

parties’ rights and obligations if a force majeure event

occurs.

The events which trigger the operative clause must be

clearly defined. As noted above, it is in the interests of

both parties to ensure that the term force majeure is

clearly defined. Please refer above in this paper for

discussion of the concept and definition of events of force

majeure in the context of the RE IPP Programme.

The preferred approach for a project company is to define

force majeure events as being any of the events in an

exhaustive list set out in the contract. In this manner, both

parties are aware of which events are force majeure events

and which are not. Clearly, defining force majeure events

makes the administration of the contract and, in particular,

the mechanism within the contract for dealing with force

majeure events simpler and more effective.

An example exhaustive definition is:

“An Event of Force Majeure is an event or

circumstance which is beyond the control and without

the fault or negligence of the party affected and which

by the exercise of reasonable diligence the party

affected was unable to prevent provided that event or

circumstance is limited to the following:

a. riot, war, invasion, act of foreign enemies,

hostilities (whether war be declared or not) acts of

terrorism, civil war, rebellion, revolution,

insurrection of military or usurped power,

requisition or compulsory acquisition by any

governmental or competent authority;

b. ionising radiation or contamination, radio activity

from any nuclear fuel or from any nuclear waste

from the combustion of nuclear fuel, radioactive

toxic explosive or other hazardous properties of

any explosive assembly or nuclear component;

c. pressure waves caused by aircraft or other aerial

devices travelling at sonic or supersonic speeds;

d. earthquakes, flood, fire or other physical natural

disaster, but excluding weather conditions

regardless of severity; and

e. strikes at national level or industrial disputes at a

national level, or strike or industrial disputes by

labour not employed by the affected party, its

subcontractors or its suppliers and which affect an

essential portion of the Works but excluding any

industrial dispute which is specific to the

performance of the Works or this Contract.”

An operative clause will act as a shield for the party

affected by the event of force majeure so that a party can

rely on that clause as a defence to a claim that it has failed

to fulfil its obligations under the contract.

An operative clause should also specifically deal with the

rights and obligations of the parties if a force majeure

event occurs and affects the project. This means the

parties must consider each of the events it intends to

include in the definition of force majeure events and then

deal with what the parties will do if one of those events

occurs.

An example of an operative clause is:

“[ ].1 Neither party is responsible for any failure to

perform its obligations under this Contract, if it

is prevented or delayed in performing those

obligations by an Event of Force Majeure.

[ ].2 Where there is an Event of Force Majeure, the

party prevented from or delayed in performing

its obligations under this Contract must

immediately notify the other party giving full

particulars of the Event of Force Majeure and

the reasons for the Event of Force Majeure

preventing that party from, or delaying that

party in performing its obligations under this

Contract and that party must use its reasonable

efforts to mitigate the effect of the Event of

Force Majeure upon its or their performance of

the Contract and to fulfil its or their obligations

under the Contract.

[ ].3 Upon completion of the Event of Force Majeure

the party affected must as soon as reasonably

practicable recommence the performance of its

obligations under this Contract. Where the

party affected is the Contractor, the Contractor

must provide a revised Program rescheduling

the Works to minimise the effects of the

prevention or delay caused by the Event of

Force Majeure





(October 2012)

[ ].4 An Event of Force Majeure does not relieve a

party from liability for an obligation which

arose before the occurrence of that event, nor

does that event affect the obligation to pay

money in a timely manner which matured prior

to the occurrence of that event.

[ ].5 The Contractor has no entitlement and the

Project Company has no liability for:

(a) any costs, losses, expenses, damages or

the payment of any part of the Contract

Price during an Event of Force

Majeure; and

(b) any delay costs in any way incurred by

the Contractor due to an Event of Force

Majeure.”

In addition to the above clause, it is important to

appropriately deal with other issues that will arise if a

force majeure event occurs. For example, as noted above,

it is common practice for a contractor to be entitled to an

extension of time if a force majeure event impacts on its

ability to perform the works. Contractors also often

request costs if a force majeure event occurs. In our view,

this should be resisted. Force majeure is a neutral risk in

that it cannot be controlled by either party. Therefore, the

parties should bear their own costs.

Another key clause that relates to force majeure type

events is the contractor’s responsibility for care of the

works and the obligation to reinstate any damage to the

works prior to completion. A common example clause is:

“[ ].1 The Contractor is responsible for the care of

the Site and the Works from when the Project

Company makes the Site available to the

Contractor until 5.00 pm on the Date of

Commercial Operation.

[ ].2 The Contractor must promptly make good loss

from, or damage to, any part of the Site and the

Works while it is responsible for their care.

[ ].3 If the loss or damage is caused by an Event of

Force Majeure, the Project Company may

direct the Contractor to reinstate the Works or

change the Works. The cost of the reinstatement

work or any change to the Works arising from a

direction by the Project Company under this

clause will be dealt with as a Variation except

to the extent that the loss or damage has been

caused or exacerbated by the failure of the

Contractor to fulfil its obligations under this

Contract.

[ ].4 Except as contemplated in clause [ ].3, the cost

of all reinstatement Works will be borne by the

Contractor.”

This clause is useful because it enables the project

company to, at its option, have the damaged section of the

project rebuilt as a variation to the existing EPC Contract.

This will usually be cheaper than recontracting for

construction of the damaged sections of the works.

Operation and Maintenance

Operating and Maintenance Manuals

The contractor is usually required to prepare a detailed

Operating and Maintenance Manual. The EPC Contract

should require the contractor to prepare a draft of the

O&M Manual within a reasonable time to enable the

project company, the operator and possibly the lenders to

provide comments, which can be incorporated into a final

draft at least 6 months before the start of commissioning.

The draft should include all information which may be

required for start-up, all modes of operation during normal

and emergency conditions and maintenance of all systems

of the Facility.

Operating and Maintenance Personnel

It is standard for the contractor to be obliged to train the

operations and maintenance staff supplied by the project

company. The cost of this training will be built into the

contract price. It is important to ensure the training is

sufficient to enable such staff to be able to efficiently,

prudently, safely and professionally operate the Facility

upon commercial operation. Therefore, the framework for

the training should be described in the appendix dealing

with the scope of work (in as much detail as possible).

This should include the standards of training and the

timing for training.

The project company’s personnel trained by the contractor

will also usually assist in the commissioning and testing

of the Facility. They will do this under the direction and

supervision of the contractor. Therefore, absent specific

drafting to the contrary, if problems arise during

commissioning and/ or testing the contractor can argue

they are entitled to an extension of time etc. We

recommend inserting the following clause:

“[ ].1 The Project Company must provide a sufficient

number of competent and qualified operating

and maintenance personnel to assist the

Contractor to properly carry out

Commissioning and the Commercial Operation

Performance Tests.





(October 2012)

[ ].2 Prior to the Date of Commercial Operation,

any act or omission of any personnel provided

by the Project Company pursuant to GC [ ].1

is, provided those personnel are acting in

accordance with the Contractor’s instructions,

directions, procedures or manuals, deemed to

be an act or omission of the Contractor and the

Contractor is not relieved of its obligations

under this Contract or have any claim against

the Project Company by reason of any act or

omission.”

Spare Parts

The contractor is usually required to provide, as part of its

scope of works, a full complement of spare parts (usually

specified in the appendices (the scope of work or the

specification)) to be available as at the commencement of

commercial operation.

Further, the contractor should be required to replace any

spare parts used in rectifying defects during the defects

liability period, at its sole cost. There should also be a

time limit imposed on when these spare parts must be

back in the store. It is normally unreasonable to require

the spare parts to have been replaced by the expiry of the

defects liability period because that may, for some long

lead time items, lead to an extension of the defects

liability period.

The project company also may wish to have the option to

purchase spares parts from the contractor on favourable

terms and conditions (including price) during the

remainder of the concession period. In that case it would

be prudent to include a term which deals with the situation

where the contractor is unable to continue to manufacture

or procure the necessary spare parts. This provision

should cover the following points:

written notification from the contractor to the project

company of the relevant facts, with sufficient time to

enable the project company to order a final batch of

spare parts from the contractor;

the contractor should deliver to, or procure for the

project company (at no charge to the project

company), all drawings, patterns and other technical

information relating to the spare parts; and

the contractor must sell to the project company (at the

project company’s request) at cost price (less a

reasonable allowance for depreciation) all tools,

equipment and moulds used in manufacturing the

spare parts, to extent they are available to the

contractor provided it has used its reasonable

endeavours to procure them.

The contractor should warrant that the spare parts are fit

for their intended purpose, and that they are of

merchantable quality. At worst, this warranty should

expire on the later of:

the manufacturer’s warranty period on the applicable

spare part; and

the expiry of the defects liability period.

The project company should be aware that the contractor

may be purchasing the spare parts from the Original

Equipment Manufacturer ("OEM"). The OEM will have

typically imposed non-negotiable warranties on the spare

parts that the contractor will try to pass-through to the

project company. This should be resisted on the part of the

project company. However, the project company should

be prepared to pay higher prices for those spare parts to

reflect the greater risk the contractor will be accepting in

place of the pass-through of the OEM warranties.

DISPUTE RESOLUTION

Dispute resolution provisions for EPC Contracts could fill

another entire paper. There are numerous approaches that

can be adopted depending on the nature and location of

the project and the particular preferences of the parties

involved.

However, there are some general principles which should

be adopted. They include:

having a staged dispute resolution process that

provides for internal discussions and meetings aimed

at resolving the dispute prior to commencing action

(either litigation or arbitration);

obliging the contractor to continue to execute the

works pending resolution of the dispute;

not permitting commencement of litigation or

arbitration, as the case may be, until after commercial

operation of the Facility. This provision must make

exception for the parties to seek urgent interlocutory

relief i.e. injunctions and to commence proceedings

prior to the expiry of any limitations period. If the

provision does not include these exceptions it risks

being unenforceable; and

providing for consolidation of any dispute with other

disputes which arise out of or in relation to the

construction of the Facility. The power to consolidate

should be at the project company’s discretion.





(October 2012)

APPENDIX 1 EXAMPLE CLAUSES

Part I - Performance Testing and Guarantee Regime

- Wind Projects - RE IPP Programme

1 COMMERCIAL OPERATION

PERFORMANCE TESTS, COMMERCIAL

OPERATION, POST COD PERFORMANCE

TESTS AND FINAL COMPLETION

Early Operation

1.1 The Contractor may notify the Owner at least 21

Days before a Unit or Units will, in the reasonable

opinion of the Contractor be ready for the issue of

the Notice of Commencement of Unit by the

Owner under the Power Purchase Agreement. The

Contractor must not provide a notice under this

clause more than 180 Days before the Scheduled

COD.

1.2 As soon as the Unit or Units are, in the reasonable

opinion of the Contractor, ready for the issue of

the Notice of Commencement of Unit by the

Owner under the Power Purchase Agreement, the

Contractor must give a notice to that effect to the

Owner.

1.3 Not later than 7 Days after receipt of the

Contractor's notice under clause 1.1, the Owner

must either:

1.3.1 issue the Notice of Commencement of

Unit to the Buyer under the Power

Purchase Agreement (with a copy to the

Contractor and the Lenders); or

1.3.2 notify the Contractor that the Unit or Units

are not ready for the issue of the Notice of

Commencement of Unit under the Power

Purchase Agreement and indicate any

defects.

1.4 If the Owner notifies the Contractor of any defects

in accordance with clause 1.3.2 the Contractor

must promptly correct those defects and the

procedures described in clauses 1.1-1.3 must be

repeated until the Owner issues the Notice of

Commencement of Unit to the Buyer under the

Power Purchase Agreement.

1.5 During the Early Operating Period, the Contractor

is responsible for the Operation and Maintenance

of the Unit or Units and all related parts of the

Works and the Facility, including providing and

training all staff and personnel required to Operate

and Maintain the Unit or Units and all related

parts of the Works and the Facility.

1.6 Despite the issue of the Notice of Commencement

of Unit to the Buyer under the Power Purchase

Agreement and any other provisions of this

Contract to the contrary, the Contractor remains

responsible for care, custody and control of the

Unit or Units and all other parts of the Works and

the Facility until the Commercial Operation Date.

1.7 In consideration for the Contractor Operating and

Maintaining the Unit or Units and all related parts

of the Works and the Facility during the Early

Operating Period and for complying with its other

obligations under clauses 1.2-1.6, the Owner must

pay the Contractor 50% of the net profit (after tax

and the Owner's costs arising out of the operation

of such Unit or Units and the generation of the

Early Operating Energy have been deducted)

derived from the Early Operating Energy

Payments received by the Owner under the Power

Purchase Agreement in respect of the Early

Operating Energy generated from such Unit or

Units. Following receipt of the Early Operating

Energy Payments, the Owner must provide the

Contractor with a statement setting out the

relevant Early Operating Energy Payments

received together with a detailed calculation of the

Owner's net profit derived therefrom and the

Contractor's share of such net profit. The

Contractor's share of such profit will be held by

the Owner in an interest bearing account until the

Contractor becomes entitled to receive such

payment in accordance with clause 1.8.

[Drafting note: the drafting of this clause will

depend on the incentive/reward structure

proposed for each contract, and should be

reviewed on a project-by-project basis.]

1.8 The Owner must pay the amounts due to the

Contractor under clause 1.7, plus the interest

accrued on such amounts, on the date which is (i)

6 Months after the Commercial Operation Date,

provided that the Post COD Performance

Guarantees up to that date have been met or

Performance Liquidated Damages payable have

been paid, or (ii) such earlier date on which this

Contract is terminated, and following receipt by

the Owner of a Tax Invoice for those amounts

from the Contractor.





(October 2012)

1.9 The issue of a Notice of Commencement of Unit

to the Buyer under clause 1.3.1 does not:

1.9.1 operate as an admission that all the

requirements of Commercial Operation in

respect of the Unit or Units have been

met;

1.9.2 prejudice any of the Owner's rights,

including the right to require the

Contractor to satisfy all these

requirements;

1.9.3 guarantee that the Unit or Units will be

connected to the System or that

Commercial Operation will be achieved;

or

1.9.4 entitle the Contractor to any payment

under clause 1.8 unless and until the

Owner receives corresponding payments

under the Power Purchase Agreement.

Performance Tests

1.10 After completion of Commissioning, the

Contractor must give the Owner at least 7 Days

prior written notice that the Equipment, Works

and Facility (or any component part of the Works

and Facility) are ready for the Commercial

Operation Performance Tests.

1.11 As soon as reasonably practicable after receipt of

a notice under clause 1.10, the Owner must issue a

notice to the Contractor specifying the date for

commencement of the Commercial Operation

Performance Tests if such date is not identified in

the Program and/or Schedule 8 (Tests).

Commercial Operation

1.12 The Contractor must notify the Owner at least 70

Days before the whole of the Works will, in the

opinion of the Contractor:

1.12.1 reach the stage of Commercial Operation;

and

1.12.2 be suitable for the issue of the Facility

Completion Form by the Independent

Engineer under the Power Purchase

Agreement.

[Note: Clause 4.5.1 of the Power Purchase

Agreement requires at least 60 Days' notice of

the Owner's intention to issue the Notice of

Commencement of Facility. This has been

lengthened to 70 Days in this Contract to provide

the Owner with time to assess this written notice

and then pass it onto the Buyer]

1.13 As soon as the whole of the Works have, in the

opinion of the Contractor, satisfied each of the

preconditions for achieving Commercial

Operation, including that the Facility Completion

Form has been issued to the Owner by the

Independent Engineer, the Contractor must give a

notice to that effect to the Owner.

[Note: The Owner requires the Facility

Completion Form as a precondition for issue of

the Notice of Commencement of Facility to the

Buyer under clause 4.5.3 of the Power Purchase

Agreement]



must either:

1.14.1 issue a Certificate of Commercial

Operation stating that the Facility has

reached Commercial Operation and the

date on which the Facility reached

Commercial Operation; or

1.14.2 notify the Contractor that the Facility has

not achieved Commercial Operation and

indicate any defects and/or deficiencies.


and/or deficiencies in accordance with

clause 1.14.2, the Contractor must promptly

correct those defects and/or deficiencies before the

Last COD and the procedures described in

clauses 1.13 and 1.14 must be repeated until the

Owner issues a Certificate of Commercial

Operation.

1.16 No payment and no partial or entire use or

occupancy of the Project Site, the Works or the

Facility by the Owner (whether during the

Commercial Operation Performance Tests or

otherwise) in any way constitutes an

acknowledgment by the Owner that Commercial

Operation has occurred, nor does it operate to

release the Contractor from or otherwise affect

any of the Contractor's warranties, obligations or

liabilities under or in connection with this

Contract.

1.17 Upon the issue of the Certificate of Commercial

Operation, the Contractor must handover care,

custody and control of the Facility to the Owner.





(October 2012)

1.18 Notwithstanding that all the requirements for the

issuing of a Certificate of Commercial Operation

have not been met, the Owner may at any time, in

its absolute discretion, issue a Certificate of

Commercial Operation. The issue of a Certificate

of Commercial Operation under clause 1.14.1 will

not operate as an admission that all the

requirements of Commercial Operation have been

met, and does not prejudice any of the Owner's

rights, including the right to require the Contractor

to satisfy all these requirements.

Post COD Performance Tests

1.19 The Contractor must give the Owner prior written

notice of when it intends to carry any of the Post

COD Performance Tests at the times and in

accordance with the requirements set out in

Schedule 8 (Tests).

1.20 As soon as reasonably practicable after receipt of

a notice under clause 1.19, the Owner must issue a

notice to the Contractor specifying the date for

commencement of the Post COD Performance

Tests at the times and in accordance with

Schedule 8 (Tests).

Final Completion

1.21 The Contractor must notify the Owner at least 10

Days before whole of the Works and Facility will,

in the opinion of the Contractor, reach the stage of

Final Completion.

1.22 As soon as the whole of the Works and Facility

have, in the opinion of the Contractor, satisfied

each of the preconditions for achieving Final

Completion the Contractor must notify the Owner.



must either:

1.23.1 issue a Certificate of Final Completion

stating that the Facility has reached Final

Completion and the date on which the

Facility reached of Final Completion; or

1.23.2 notify the Contractor that the Facility has

not achieved of Final Completion and

indicate any defects and/or deficiencies.


and/or deficiencies, the Contractor must then

correct those defects and/or deficiencies and the

procedures described in clauses 1.21 to 1.23 must

be repeated until the Owner issues a Certificate of

Final Completion.

1.25 The Certificate of Final Completion will be

evidence of accord and satisfaction, and in

discharge of each Party's obligations in connection

with this Contract except for obligations in

relation to Spare Parts, Warranted Component

Parts, indemnities or unresolved issues the subject

of any Dispute of which notice has been given

prior to the issue of the Certificate of Final

Completion.

1.26 Despite any other provision of this Contract, no

partial or entire use or occupancy of the Project

Site, the Works or the Facility by the Owner after

the Commercial Operation Date, whether during

the Post COD Performance Tests or otherwise, in

any way constitutes an acknowledgment by the

Owner that Final Completion has occurred, nor

does it operate to release the Contractor from any

of its warranties, obligations or liabilities under or

in connection with this Contract including the

satisfactory performance of its obligations during

the Defects Liability Period, the carrying out of

the Post COD Performance Tests and meeting the

Post COD Performance Guarantees.

2 PERFORMANCE GUARANTEES

Contractor's guarantee

2.1 The Contractor guarantees that the Facility and all

component parts will meet all of the Performance

Guarantees as specified in the Performance

Guarantees Schedule, including the Commercial

Operation Performance Guarantees and the Post

COD Performance Guarantees.

Minimum Acceptance Capacity not achieved

2.2 Following the completion of the Commercial

Operation Performance Tests, if the Capacity of

the Facility is not greater than the Minimum

Acceptance Capacity, the Contractor must at its

cost and expense make changes, modifications or

additions to the Facility, or any part of the

Facility, as may be necessary for the Facility to

reach a Capacity greater than the Minimum

Acceptance Capacity. The Contractor must notify

the Owner upon completion of the necessary

changes, modifications or additions and must,

subject to the Owner's rights under clause 2.3,

continue to repeat the Commercial Operation





(October 2012)

Performance Tests until the Capacity of the

Facility is greater than the Minimum Acceptance

Capacity.

[Drafting Note: this is a pass through of

clause 4.5.6 of the PPA.]

Owner's rights

2.3 If, for reasons not attributable to the Owner, the

Capacity is not greater than the Minimum

Acceptance Capacity by the Last COD, the Owner

may terminate this Contract. If, for reasons not

attributable to the Owner, the Capacity is not

greater than the Minimum Acceptance Capacity

by the Last COD, and any of the Project

Documents is terminated, in addition to having the

right to terminate this Contract, the Owner may

also reject the Facility.

Commercial Operation Performance Guarantees

not achieved

2.4 If, after carrying out the Commercial Operation

Performance Tests, any of the Commercial

Operation Performance Guarantees have not been

met, the Owner may direct the Contractor to make

changes, modifications or additions to the Facility

or any part of the Facility as may be necessary to

meet the Commercial Operation Performance

Guarantees. Without limiting the Owner's rights

in this clause, the Contractor may within 7 Days

of the performance of any Commercial Operation

Performance Test which revealed that any of the

Commercial Operation Performance Guarantees

have not been met, notify the Owner that it wishes

to make changes, modifications or additions to the

Facility or any part of the Facility as may be

necessary to meet the Commercial Operation

Performance Guarantees, provided such notice is

given at least 3 Months prior to the Last COD.

Owner directs changes to Facility

2.5 If the Owner directs the Contractor in accordance

with clause 2.4 or the Contractor notifies the

Owner in accordance with clause 2.4, the

Contractor must:

2.5.1 at the Contractor's cost and expense, make

the changes, modifications or additions to

the Facility or any part of the Facility as

may be necessary to meet the Commercial

Operation Performance Guarantees;

2.5.2 notify the Owner upon completion of the

necessary changes, modifications or

additions; and

2.5.3 continue to repeat the Commercial

Operation Performance Tests until the

Commercial Operation Performance

Guarantees have been met or until the Last

COD, whichever is earlier.

2.6 Notwithstanding that t any of the Commercial

Operation Performance Guarantees have not been

met, but provided that all of the other

requirements for Commercial Operation have been

met, or waived in writing by the Owner, and the

Contractor has not given a notification

contemplated in, and within the 7 Day period

contemplated in, clause 2.4, the Owner may at any

time prior to the Last COD issue a Certificate of

Commercial Operation, in which case the process

set out in clauses 2.23 to 2.26 must be followed.

[Drafting Note: this is a pass through of

clauses 4.5.5.1 and 4.5.5.2 of the PPA.]

Owner issues Certificate of Commercial Operation

2.7 If the Owner issues a Certificate of Commercial

Operation under clause 2.6, the Contractor must

do all things reasonably necessary to assist the

Owner to ensure that the requirements for the

issue of a Certificate of Commercial Operation in

relation to the Facility are met.

Reduction in Contract Price for failure to achieve

the Commercial Operation Performance

Guarantees

2.8 Despite any provision of this Contract, if any of

the Commercial Operation Performance

Guarantees have not been met at the earliest of:

2.8.1 the Last COD;

2.8.2 when the Contractor is liable for Delay

Liquidated Damages up to the aggregate

liability; or

2.8.3 when the Owner issues a notice deeming

Commercial Operation to have been

achieved (notwithstanding that any of the

other Commercial Operation Performance

Guarantees have not been met) under

clause 2.6,

the Owner will be entitled to a reduction in the

Contract Price determined in accordance with the





(October 2012)

Liquidated Damages Schedule and the Contract

Price will be reduced accordingly.

Performance Liquidated Damages for failure to

achieve the Post COD Performance Guarantees

2.9 Despite any provision of this Contract, if the

Contractor does not meet the Post-COD

Performance Guarantees in accordance with the

Performance Guarantees Schedule after the

Commercial Operation Date, the Contractor must

pay to the Owner the Performance Liquidated

Damages in the amounts specified in the

Liquidated Damages Schedule and at the times

specified in clause 2.11.

Satisfaction of Performance Guarantees

2.10 The Owner's entitlement to a reduction in the

Contract Price under clause 2.8 and the payment

of Performance Liquidated Damages under

clause 2.9 will be in satisfaction of the relevant

Performance Guarantees.

Due and payable

2.11 Performance Liquidated Damages must be

invoiced in accordance with clause 2.8 by the

Owner and payment will be due within 30 Days of

issue of such invoice. At the expiration of 30 Days

the amount invoiced will be a debt due and

payable to the Owner on demand and may be

deducted from any payments otherwise due from

the Owner to the Contractor and the Owner may

also have recourse to the security provided under

this Contract.

Aggregate liability

2.12 The aggregate liability of the Contractor for

Performance Liquidated Damages for breach of

Post-COD Performance Guarantees under

clause 2.9 (but excluding any reduction in the

Contract Price pursuant to clause 2.8 or any other

amounts expressly excluded in the Liquidated

Damages Schedule from the cap on Performance

Liquidated Damages under this clause 2.12) will

not exceed the amount specified in the Liquidated

Damages Schedule.

Duplicate damages

2.13 Nothing in this clause 2 entitles the Owner to

claim duplicate damages under this Contract and

under law regarding the failure of the Contractor

to meet the Performance Guarantees.

Part II – Extension of Time Regime

3 PERFORMANCE GUARANTEES

Notice

3.1 The Contractor must give notice to the Owner of

all incidents, circumstances or events (Events)

of any nature affecting or likely to affect the

progress of the Works which might be

reasonably expected to result in a delay to the

Works achieving Commercial Operation by

the Scheduled COD as soon as reasonably

possible after the Contractor has become

aware that such Event has arisen.

Further notice

3.2 Within 21 Days after the Contractor becomes

aware that an Event has first arisen, the Contractor

must give a further notice to the Owner which

must include:

3.2.1 the material circumstances of the Event

including the cause or causes;

3.2.2 the nature and extent of any delay caused

by the Event;

3.2.3 the corrective action already undertaken or

to be undertaken;

3.2.4 the effect on the critical path noted on the

Program;

3.2.5 whether in its opinion, the Event qualifies

as one which entitles the Contractor to an

extension of time to the Scheduled COD;

3.2.6 the period, if any, by which in its opinion

the Scheduled COD should be extended;

and

3.2.7 a statement that it is a notice under this

clause.

Continuing Events

3.3 Where an Event has a continuing effect or where

the Contractor is unable to determine whether the

effect of an Event will actually cause delay to the

progress of the Works so that it is not practicable

for the Contractor to give notice under clause 3.2,

a statement to that effect with reasons together

with interim written particulars (including details

of the likely consequences of the Event on

progress of the Works and an estimate of the





(October 2012)

likelihood or likely extent of the delay) must be

submitted by the Contractor in place of the notice

required under clause 3.2. The Contractor must

then submit to the Owner, at intervals of 14 Days

or less, further interim written particulars until the

actual delay caused (if any) is ascertainable, at

which time the Contractor must as soon as

practicable but in any event within 42 Days give a

final notice to the Owner including the particulars

specified in clause 3.2.

Determination by Owner

3.4 Within 42 Days after receipt of the notice in

clause 3.2 or the final notice in clause 3.3, the

Owner must issue a notice notifying the

Contractor's Representative of its determination as

to whether the relevant Event qualifies as one

which entitles the Contractor to an extension to

the Scheduled COD, and if it does, the period, if

any, by which the Scheduled COD is to be

extended.

3.5 Any extension of time given in relation to a delay

caused by an event of Force Majeure,

Compensation Event or System Event must not

exceed the duration of any extension to the

Scheduled COD under the Power Purchase

Agreement which the Owner receives in relation

to the same events provided that the Contractor's

right to receive an extension of time will apply

irrespective of whether or not the Owner actually

claims an extension of time under the Power

Purchase Agreement (where it is entitled to claim

an extension of time under the Power Purchase

Agreement).

Causes of delay

3.6 Subject to the provisions of this clause, the

Contractor is entitled to an extension of time to the

Scheduled COD as the Owner assesses where a

delay to the achievement of Commercial

Operation is caused by any of the following

events, whether occurring before, on or after the

Scheduled COD:

3.6.1 any act, omission, breach or default by the

Owner or its Personnel;

3.6.2 a Variation, except where that Variation is

caused by an act, omission or default of

the Contractor, its Personnel or its

Subcontractors;

3.6.3 a suspension of the Works under this

Contract, except where that suspension is

caused by an act, omission or default of

the Contractor, its Personnel or its

Subcontractors;

3.6.4 a Compensation Event;

3.6.5 a System Event;

3.6.6 Unforeseeable Conduct;

3.6.7 an event of Force Majeure; or

3.6.8 such other events specified in this

Contract which entitle the Contractor to an

extension of time.

Extension of time

3.7 Despite any other provisions of this clause, and

notwithstanding that the Contractor is not entitled

to or has not claimed an extension of time to the

Scheduled COD, the Owner may, in its absolute

sole and unfettered discretion, at any time grant an

extension of the Scheduled COD. The Owner has

no obligation to grant, or to consider whether it

should grant an extension of time and is not

required to exercise this discretion for the benefit

of the Contractor.

Conditions precedent

3.8 If the Contractor fails to submit the notices

required under this clause within the times

required, or fails to comply with any other notice

requirement under this Contract regarding the

event then:

3.8.1 the Contractor has no entitlement to an

extension of time; and

3.8.2 the Contractor must comply with the

requirements to perform the Works by the

Scheduled COD.

Must impact on critical path

3.9 It is a further condition precedent of the

Contractor's entitlement to an extension of time

that:

3.9.1 the Contractor is or actually will be

prevented from achieving Commercial

Operation by the Scheduled COD by an

Event, and the Event qualifies as one

which entitles the Contractor to an

extension of time to the Scheduled COD

under this clause; and





(October 2012)

3.9.2 the relevant delay is demonstrable on an

assessment of the actual and then current

critical path to achieving Commercial

Operation by the Scheduled COD.

Acceleration

3.10 The Owner may direct the Contractor's

Representative to accelerate the Works for any

reason.

3.11 The Contractor must submit within 5 Days after

an acceleration direction under clause 3.10, a

revised Program for the approval of the Owner.

The Contractor must set out any likely effects the

direction has on the Works and the Scheduled

COD.

Contractor entitled to additional costs

3.12 The Contractor will be entitled to all extra costs

necessarily incurred (which do not include off-Site

overheads, profit or loss of profit), by the

Contractor in complying with an acceleration

direction, except where the direction was issued as

a consequence of the failure of the Contractor to

fulfil its obligations under this Contract. The

Owner must assess and decide as soon as

reasonably practical, the extra costs necessarily

incurred by the Contractor.

Concurrent causes of delay

3.13 If there are 2 or more Events which constitute

concurrent causes of delay and at least one of

those concurrent causes is a cause of delay which

would not entitle the Contractor to an extension of

time under this Contract, the Contractor is not

entitled to an extension of time for the period of

that concurrency.

Part III - Grid Access Regime

4 GRID ACCESS

[Note: This GC is an either/or choice of the Distribution

System and the Transmission System depending upon

which System the Owner wishes to connect with. The

difference between the 2 systems is that the Distribution

System is a distribution network of any Distributor

which operates at a nominal voltage of 132 kV or less, as

described in the Codes. The Transmission System is the

national transmission system of the NTC, consisting of

all lines and substation equipment which operate at a

nominal voltage of above 132 kV. Item 14 of Part A

(General Requirements, Rules and Provisions) of the

RFP sets out that the Owner will need to either connect

to the Transmission System via the Transmission

Agreement or the Distribution System by either the

Distribution Agreement or a Pro-forma Municipal

Distribution Agreement. As a result, the Owner and

Contractor will need to select and modify the below

provisions based upon the choice of system]

Managing Connection to the System

4.1 The Contractor must undertake and co-ordinate

the Connection Works with the NTC, Independent

Engineer and Distributor, and provide termination

facilities specified in the Specification.

4.2 The Contractor must liaise with NERSA, the

NTC, Distributor, DOE, Buyer, Responsible

Authorities, Independent Engineer, the Owner and

other Parties to avoid delays in undertaking the

Connection Works and connecting the Facility to

the Transmission System and/or Distribution

System.

Transmission and Connection System

4.3 On the Date for First Synchronisation the Owner

must ensure that there is in place a Transmission

System and/or Distribution System which is

capable of receiving the generated net output the

Facility is physically capable of producing at any

given time.

Owner's obligation

4.4 The Owner's obligation to ensure that the

Transmission System and/or Distribution System

is in place is subject to the Facility being able to

be connected to the Transmission System and/or

Distribution System and the Contractor being able

to import and/or export power.





(October 2012)

First Synchronisation before Date for First

Synchronisation

4.5 If the Contractor notifies the Owner that First

Synchronisation is likely to take place before the

Date for First Synchronisation, the Owner must

use its reasonable endeavours to ensure that the

Transmission System and/or Distribution System

is in place to enable First Synchronisation to take

place in accordance with the Contractor's revised

estimate of First Synchronisation. The Contractor

is not entitled to claim any additional cost or

expense or any adjustment to the Contract Price or

to claim any extension to the Scheduled COD or

to make any claim under any applicable Law, at

law, in equity or otherwise, if the Distribution

System is not in place to enable First

Synchronisation to take place in accordance with

the Contractor's revised estimate of First

Synchronisation.

Export of power

4.6 At the time of and following First Synchronisation

the Owner will ensure that the Contractor is

permitted to export to the Transmission System

and/or Distribution System power which the

Facility is physically capable of exporting,

provided that:

4.6.1 it is necessary for the Contractor to export

that amount of power if the Contractor is

to obtain Commercial Operation;

4.6.2 the Contractor has complied in all respects

with its obligations under the 'Code

Requirements'; and

4.6.3 in the reasonable opinion of the Owner

and/or the NTC, Distributor or NERSA

the export of power by the Facility will

not pose a threat to the safety of persons

and/or property (including the

Transmission System and/or Distribution

System).

No breach

4.7 The Owner will not be in breach of any obligation

under this Contract by reason only of the

Contractor being denied permission to export

power to the Transmission System and/or

Distribution System in accordance with the Codes

for reasons attributable directly or indirectly to the

Contractor and/or the performance of the Facility

as a whole.

No deemed Commercial Operation

4.8 The Contractor acknowledges that there will not

be any deemed Commercial Operation as a result

of the connection of the Facility to the

Transmission System or the sale of any electricity.

Code requirements

4.9 The Contractor must perform the Works

(including the Connection Works) to ensure that

the Owner and Contractor [its Personnel and

Subcontractors] each comply with the

requirements of any Responsible Authorities and

each Party's obligations under the:

4.9.1 Codes;

4.9.2 applicable Laws; and

4.9.3 Project Documents.

Avoidance of Damage or Interference to

Transmission System

4.10 The Contractor must perform the Works

(including the Connection Works) to ensure that:

4.10.1 any interference to the Transmission

System and/or Distribution System is

minimised; and

4.10.2 damage to the Transmission System

and/or Distribution System is avoided.

Reporting of interference

4.11 The Contractor must immediately report to the

Owner's Representative any interference with and

damage to the Transmission System and/or

Distribution System which connects with the

Facility of which it is aware.

Additional obligations

4.12 In performing any test which requires the

Contractor to supply electricity to the

Transmission System and/or Distribution System,

the Contractor must:

4.12.1 on behalf of the Owner, comply with the

Owner's obligations under clause 2 of the

Transmission Agreement and/or clause 12

of the Distribution Agreement as they

relate connection and synchronisation of

the Facility with the Transmission System

and/or Distribution System;





(October 2012)

[Note: This is a pass-through of clause 2

of the Transmission Agreement and

clause 12 of the Distribution Agreement]

4.12.2 issue a notice to the Owner's

Representative at least 48 hours prior to

the time at which it wishes to so supply,

detailing the testing or commissioning and

including the Contractor's best estimate of

the total period and quantity (in MWh per

half-hour) of that supply;

4.12.3 promptly notify the Owner's

Representative if there is any material

change in the information contained in

such notice; and

4.12.4 do all things reasonably necessary to assist

the Owner (including co-operating with

the NTC and complying with its 'Code

Requirements' obligations).





(October 2012)

APPENDIX 2

Schedules - wind projects - RE ipp

programme

TESTING

[A complete testing of a wind facility requires the facility

to be grid-connected. It is therefore important to

continue the testing following the Commercial Operating

Date.]

[The tests shall comply with the minimum requirements

of this section as well as minimum requirements in the

PPA and in the Employer's Requirements.

Figure 1 (at the end of this Appendix 2) shows an

overview of the regime for the testing. In order for the

Project to obtain an Facility Completion Form (the

"Facility Completion Form") the following tests must

have been completed:

- Factory Tests

- Commissioning Tests for all components:

Wind Turbines and ancillary equipment

- Acceptance Tests

On completion of the Factory Tests, the Employer shall

provide to the Contractor a certificate stating that these

tests have been satisfactorily completed (the "Factory

Certificate"). On completion of the Commissioning

Tests, the Independent Engineer shall provide to the

Employer a certificate stating that these tests have been

satisfactorily completed (the "Commissioning

Certificate"). On completion of the Acceptance Tests,

the Independent Engineer shall provide to the Employer

a certificate stating that these tests have been

satisfactorily completed (the "Facility Completion

Form").

Tests shall be performed on each Wind Turbine and on

the ancillary equipment. Certificates shall be issued

separately for each component of the Wind Farm. When

all the Acceptance Certificates have been issued for all

the components which make up the Wind Farm the

Project Acceptance Test shall be completed, and the

Facility Completion Form shall be issued by the

Independent Engineer.]

1 PRE-COD PERIOD TESTING

1.1 Precommissioning Tests

[List details of tests to be passed prior to commissioning

in the table below or incorporate by reference tests set

out in the Specification if applicable.

Please note that all tests conducted as Precommissioning

Tests will have to be conducted without grid connection.

The below headings are an indication of the nature of

the tests that should be included. The final testing

regime will need to be finalised with the Technical

Adviser.

The Precommissioning Tests should include any

requirements under the applicable grid code or other

legal requirement prior to the grid connection.]

1.1.1 General Testing Activities

The Works have been performed in compliance with the

Specification and any subsequent Variation and all further

items set out in GC 5.1.

The as-built drawings are an exact representation of the

Works.

The Works have been performed in a workmanlike

manner and are in compliance with all requirements

stipulated or referred to in GC 5.1.

1.1.2 Factory Tests

The Contractor must undertake the standard factory tests

(the Factory Tests) set out in this Schedule 8 (Tests).

Details of and schedule for the Factory Tests shall be

provided by the Contractor for their own and for third

party witnessing and shall form part of this Contract.

Certificates of conformity to the Owner's inspection

criteria shall be provided to the Contractor as specified

under the Specification (Schedule 1).

The minimum requirements for Factory Tests shall be as

follows.

Factory Test certificates shall be provided by the

Contractor for the following components:

(a) Wind Turbine foundations and other civil work

with reference to the Specification (including

but not limited to the reinforcing steel material

certificates, concrete batching plant certification

and concrete mix records).

(b) Wind Turbine towers with reference to the

Specification (including but not limited to

steel plate material certificates, weld test

results and paint conformity (inside and

outside)).

(c) Wind Turbine:





(October 2012)

(i) Generator (including but not limited to

incoming inspection: dimensional

accuracy, proving test run results with

respect to: sensors, heaters, fans).

(ii) Gearbox (including but not limited to


accuracy, proving test run, sensors,

heaters, fans, pumps).

(iii) Power converter (including but not

limited to visual inspection before

shipping).

(iv) Yaw drives (including but not limited to


accuracy, proving test run results with

respect to: sense of rotation, wind

tracking).

(v) Blade pitch drives (including but not

limited to incoming inspection:

dimensional accuracy, proving test run

results with respect to: functional test of

pitch system).

(vi) Major castings (hub, low speed shaft)

(including but not limited to incoming

inspection: dimensional accuracy,

painting, ultra sonic testing on

suspicious blowholes).

(d) Electrical testing activities including but not

limited to:

The proper electrical construction and

functioning of the Facility shall be tested, to

the extent possible without the Facility

being connected to the Distribution System

or Transmission System, including but not

limited to the testing of the:

(i) Wind Turbine transformers.

(ii) Substation transformer(s).

(iii) Auxiliary supplies transformers.

(iv) Power cables.

(v) Optic fibre cables.

(vi) MV and HV switchgear.

Routine tests shall be performed on all

transformers.

Tests for the cables shall include as a

minimum:

(vii) Capacitance measurement.

(viii) Tan-delta measurements, as a function

of voltage and of temperature.

(ix) Partial discharge measurement.

(x) Impulse withstand test followed by

partial discharge measurement.

(xi) Heating cycle test followed by partial

discharge measurement.

(xii) Bending and tension tests.

(e) Wind Turbine assemblies:

(i) The Owner shall provide details of tests

with respect to the Wind Turbine

assembly works to demonstrate

conformance with the standard quality

system adopted by the Contractor. The

complete set of quality records will be

available for inspection by Owner for

each Wind Turbine.

(f) SCADA:

(i) Tests to ensure all hardware bought

from outside suppliers or manufactured

in-house by the Contractor is working

according to the technical specifications

of the suppliers or Contractor.

(ii) Demonstration that the central server

and software system communicate with

the Wind Turbine controllers through an

agreed protocol.

(iii) Demonstration that the central server


the meteorological mast data-loggers

through an agreed protocol.

(iv) Demonstration that the central server


the Meters and the substation control

and command system through an agreed

protocol.

(v) Bench testing of a representative test

system to demonstrate hardware

connection to the communication system

and operation of the software.





(October 2012)

1.1.3 Monitoring & Security System Testing

Activities

Correct supply and positioning of all the monitoring

systems and security systems (including but not limited to

any microwave detectors and the CCTV) with reference to

the Specification.

(a) Proper connections of the cables in the

monitoring systems and security systems.

(b) Electrical continuity of the appropriate parts of

the monitoring and security system components.

(c) Proper functioning of all aspects of the

monitoring system and security system,

including but not limited to proper functioning

of the alarms and proper off-site data

transmission.]

[List details of tests to be passed prior to commissioning

in the table below or incorporate by reference tests set

out in Specification if applicable]

Description of

Precommission tests

Required result

In the presence of our

representative, you must

carry out the tests set out

in [insert reference to

relevant specification or

applicable industry

standard (including title,

author and revision date)]

on each [insert description

of relevant part of the

Works or the Facility].

100% of the [insert

description of relevant

part of the Works or the

Facility] must achieve

100% compliance with

[insert reference to

relevant specification or

applicable industry

standard (including title,

author and revision

date)].

[insert] test [insert]

1.2 Commissioning Tests

[List details of tests to be passed in the table below or

incorporate by reference tests set out in Specification

(Schedule 1) if applicable.

The below headings are an indication of the nature of

the tests that you should include. This is not a complete

list.

Please confirm with your technical advisor whether any

specific testing activity does not require grid connection

to be in place and could, accordingly, be conducted as

part of the Precommissioning Tests.

The Commissioning Tests typically include a range of

tests required by the grid operator under the relevant

grid code and are therefore highly country-specific.

The Commissioning Tests will include all those tests

required to be conducted while the Facility is connected

to the Distribution Network and that will be necessary

prior to the Performance Tests being carried out.

The Commissioning Tests should include any

requirements under the applicable grid code or other

legal requirement prior to achieve operating grid

connection.]

1.2.1 Wind Turbine Tests

The Commissioning Tests on each Wind Turbine shall

follow the standard Contractor's test but include the

following as a minimum:

(a) A test run of six (6) hours duration with

operational data recorded by the SCADA. Spot

values of power versus wind speed so recorded

shall demonstrate that the Wind Turbine is

operating reasonably within the design envelope

of performance guaranteed by the Contractor.

(b) Demonstration that vibration levels are

acceptable and within values specified by the

Owner.

(c) At least one trip per Wind Turbine shall be

carried out when the Wind Turbine is

generating, and the trip shall be recorded by the

SCADA.

(d) Demonstration of the satisfactory operation of

the yaw drive and brakes.

(e) Insulation resistance.

The Contractor shall specifically check that all the control

settings on the Wind Turbines are in accordance with the

[Turbine Type Certificate].

Upon successful commissioning of each individual Wind

Turbine demonstrating the Wind Turbines can be operated

satisfactorily and safely a Commissioning Certificate will

be issued.

1.2.2 Electrical System Tests

Commissioning Tests shall be performed on all items of

the Wind Farm electrical system, in accordance with the

standards of a Reasonable and Prudent Operator, the

standard procedures of the Contractor and the

requirements of this Contract, and shall include (but not

be limited to) the following:





(October 2012)

(a) Wind Turbine transformers:

(i) Check mechanical state and earth

connections.

(ii) Check satisfactory equipment labelling.

(iii) Check tap selector switch in correct

position.

(b) Substation transformers:

(i) Ratio measurement on all tap settings.

(ii) Winding resistance measurement on

highest, lowest and nominal tap settings.

(iii) Insulation resistance between all

windings, and each winding to earth;

(iv) Insulation resistance core-to-earth.

(v) Oil sample tests: breakdown strength,

moisture content, and dissolved-gas

content.

(vi) Check all earth connections.

(vii) Check all control, alarms, fans and

pumps for correct operation.

(viii) Check for satisfactory labelling.

(c) Medium Voltage cables:

(i) Visual check for damage to insulation,

and satisfactory identification of cores.

(ii) Perform insulation resistance tests.

(iii) Check conductor and sheath

conductivity and continuity.

(iv) Check neutral and earth connection

continuity (if applicable).

(v) Perform AC/DC voltage withstand tests

(“pressure test”) or otherwise as

recommended by cable manufacturer.

(vi) Check connection boxes.

(d) Medium Voltage and High Voltage switchgear:

(i) Check earth connections and

mechanical state.


(iii) Check all secondary wiring matches

drawings and all cores are clearly

identified.

(iv) Perform functional test (trip/close),

including remote operation and

indications if applicable.

(v) Perform voltage withstand tests

(“pressure test”) (to earth, between

phases, and across open switch

contacts).

(vi) Perform conductivity tests across switch

contacts (including earth switches) and

across busbar joints (if applicable).

(e) Protection and control systems and relays:

(i) Check mechanical state and earth

connection of all cubicles.


(iii) Check all wiring within cubicles

matches drawings and all cores are

clearly identified.

(iv) Perform insulation resistance tests on

all secondary wiring.

(v) Perform magnetisation tests on all

current transformers, and check

polarity.

(vi) Perform primary injection tests on

current transformers, to relay terminals,

to check ratios and correct connections.

(vii) Perform secondary injection tests.

(viii) Perform functional tests.

(ix) Check calibrations of all measurement

transducers and Meters.

(f) Earth (ground) systems:

(i) Measure resistance to earth of each

earth electrode system, and check

against design values and statutory

requirements.

Upon successful commissioning of the electrical system

demonstrating the system can be operated satisfactorily

and safely a Commissioning Certificate will be issued.

1.2.3 Meteorological Masts and Instruments

Tests

Commissioning Tests shall be performed on the

meteorological masts (including the Reference Mast) as

follows:





(October 2012)

(a) Visual check on the assembly of all joints and

on the as-installed condition of all components;

(b) Sample checking of bolt torques

(c) Commissioning Tests shall be performed on the

meteorological masts instrumentation as

follows:

(i) Visual check on the condition of all

components, mounting cable routing

and electrical connections.

(ii) End to end line calibrations.

(iii) Real time consistency check on all

measurements.

(iv) Proper communications with the

SCADA.

(v) Complete calibration certificates of all

the instruments have been provided.

(vi) Functional check of the local logger.

(vii) Check time stamp is synchronised with

the SCADA system and the Meters.

Upon successful commissioning of the meteorological

masts and instruments demonstrating the system can be

operated satisfactorily and safely a Commissioning

Certificate will be issued.

1.2.4 SCADA Tests

Commissioning Tests shall be performed on the SCADA

as follows:

(a) Owner's standard Commissioning Tests for the

SCADA;

(b) Attenuation measurements on all optical fibres;

(c) Tests to demonstrate that the system is able to

record the data needed for the Acceptance Test

procedures, namely:

(i) Ten (10) minute average values for wind

speed, power, and operational status

from all the Wind Turbines;

(ii) Occurrence and correction of Wind

Turbine events;

(iii) Ten (10) minute average values for wind

speed, direction, temperature and

pressure from the meteorological

mast(s) and the Reference Mast;

(iv) Ten (10) minute average values of

power, reactive power, frequency, and

power factor from the Interconnection

Points.

Upon successful commissioning of the SCADA system

demonstrating that the system can be operated

satisfactorily and safely a Commissioning Certificate will

be issued.

1.2.5 Foundations and other Civil Works Tests

Concrete strength test results:

(a) [four (4)] grout cubes to be taken every [five]

cubic meter ([5]m3), for testing after twenty-

four (24) hours, seven (7) days and twenty eight

(28) days; and

(b) one will be kept as a permanent record.

There shall be documentary evidence of completion of all

the other civil works and completion of the O&M

building.

Upon successful testing and inspection of the civil

demonstrating that the foundations can be used safely a

Commissioning Certificate will be issued.

1.2.6 Tests pursuant to regulatory

requirements and grid code

Any tests that might be required under regulatory regimes

or the grid code.]

Description of

Commissioning Tests

Required result

[insert] test [insert]

1.3 Performance Test

[Commissioning Tests for each Wind Turbine shall be

conducted before Acceptance Tests. However, it is not

necessary that all the Wind Turbines' Commissioning

Tests have been completed in order to undertake the

Acceptance Tests.

Figure 2 (refer at the end of Appendix 2) provides an

overview of the testing regime. On successful completion

of each of the Acceptance Tests an Acceptance

Certificate is issued.

If any significant defects occur during the course of any

Acceptance Test, they shall be remedied immediately by

the Owner and the Acceptance Test for the affected item





(October 2012)

shall start again as soon as the defect has been

remedied.

Where testing requirements address abnormal events

such as transients and lightning strikes, compliance

shall be demonstrated in accordance with design

documents and by physical inspection.

Acceptance of the Project is achieved upon the

successful completion of the Project Acceptance Test

and issue of a list of insubstantial or minor defects that

do not affect the safe operation of the Wind Farm.

When the Project's Acceptance Test has been achieved

the Project Acceptance Certificate will be issued.]

1.3.1 Wind Turbine Acceptance Test

The reliability of each Wind Turbine shall be

demonstrated by its operation for a total of two hundred

and forty (240) continuous hours with minimum

availability of ninety-seven percent (97%), with the Wind

Turbine producing and exporting power to the grid for at

least one hundred and twenty (120) hours and operating at

above rated wind speed for at least eight (8) hours without

defects of any kind that could affect its long term

operation. Operation in this section means rotating and

connected to [insert] electrical system. It is not necessary

that the one hundred and twenty (120) hours out of the

two hundred and forty (240) hours be continuous.

Any gross deviations from the warranted power curve

shall be classed as defects including, as a minimum, any

deviation in excess of [10] %, from the nominal rated

power, of the power output averaged over those periods

when operation is above rated wind speed and below cut-

out wind speed.

The time and date on commencement of the test shall be

recorded. All power output data, faults, errors, trips etc.

that occur during the test shall be recorded by the

SCADA.

1.3.2 Electrical system Acceptance Test

The electrical system Acceptance Test shall consist

of:

(a) Satisfactory operation without failures of any

kind during the period commencing with the

start of the first Wind Turbine Acceptance Test,

and ending at the successful completion of the

last Wind Turbine Acceptance Test.

(b) After a period of at least [four (4)] hours at or

above ninety percent [90%] of rated Wind Farm

output, check the temperature of all Wind

Turbine transformers and show satisfactory

agreement with expected values appropriate to

the load and the ambient air temperature.

(c) After a period of at least [four (4)] hours at or

above ninety percent [90%] of rated Wind Farm

output, check the temperatures of the substation

transformer(s) and show satisfactory agreement

with the expected values appropriate to the load

and the ambient air temperature.

(d) Demonstrate that the Wind Farm has met all the

requirements for connection to the grid, and

obtain a certificate to that effect.

(e) Demonstrate by calculation, based on Factory

Test results for transformers and cables, that the

electrical losses (full-load loss and no-load loss)

between the Wind Turbine terminals and the

grid connection point are equal to or less than

the values provided as Level A documentation

as described in the Technical Specification.

(f) Demonstration of the remote disconnection to

be witnessed by the Owner.

1.3.3 Substation Acceptance Test

The Contractor shall carry out Acceptance Tests of the

substation primarily based on factory tests and site-

specific tests to be provided by the Owner, in accordance

with the Specifications. The substation Acceptance Tests

shall consist of, but not be limited to, the following:

(a) Check the conformity of civil engineering

works and high, medium and low voltage

equipments. Following on-site checks, minutes

shall be signed by representatives of the Owner.

(b) Checks, tests and conformity control tests of

civil engineering works and high, medium and

low voltage equipments.

(c) Supplying a protocol for factory testing on the

relay cabinets before their delivery.

(d) Individual tests and checks of all low voltage

materials, to be done by the Owner, as

evidenced by minutes to be delivered to the

Owner.

(e) The Contractor shall arrange for all checks and

tests of low voltage equipments to be done by a

team of specialists, in the presence of an

appointed Owner's representative, and the

Contractor shall deliver written minutes for such

tests.





(October 2012)

(f) The Contractor shall complete the following

checks and tests (without limitation):

Tests of the following circuits, in accordance

with relevant outlines:

(i) open/shut circuit breakers and selectors.

(ii) signals and alarms.

(iii) sequence checks of mechanical and

electric locking mechanism.

(iv) trigger and locking mechanism.

(v) CA and CC ancillary systems (engines

and heaters supply, etc).

Check characteristics of all current

transformers:

Isolation tests between:

(vi) primary and earth.

(vii) secondary and earth.

(viii) polarity or designation of accepted

terminals.

(ix) transformation ratio. For each core,

five (5) measurements shall be taken at

10%, 30%, 50%, 70% and 100% of

nominal current.

Check characteristics of all voltage

transformers:

(x) isolation tests between secondary and

earth.

(xi) polarity or designation of accepted

terminals.

(xii) secondary input from outlet boxes (TC

and TT) to check proper joining of

measurement and protection equipment.

(xiii) primary input in all TC. A 50% nominal

current input shall be enough.

(g) Check and test all the substation's low voltage

equipment (protection equipment, operation

control, ancillary services, etc)

(h) Adjustment, calibration and definition of

parameter for protection, operation control,

conducting posts and monitoring station

equipment shall be done by the Contractor.

(i) Operational tests and commissioning of all

facilities and associated communication.

(j) Once tension and control cables are in place,

and before they are connected, the Owner shall

complete isolation measurement between all

conductors and the frame or screen. This

measurement shall be at 500V, and shall

produce a value of no less than 35 M Ohms.

(k) Check cable connection and continuity. These

checks are independent from the factory tests of

the equipment's internal cabling.

(l) All checks, tests and commissioning shall

be done with the Owner as witness.

(m) The costs of equipment and materials necessary

for testing and checking the facilities shall be

borne by the Contractor.

(n) The facilities shall be operational, ready for the

commissioning of the substation in accordance

with usual operation and safety requirements

and in accordance with industry practice.

1.3.4 SCADA Acceptance Test

The SCADA Acceptance Test shall follow successful

commissioning of all the Wind Turbines, meteorological

masts and substation sensors and controls. The SCADA

Acceptance Test shall provide evidence of full compliance

with the SCADA supplier's agreed specification including

evidence of proper calibration of the transducers and

signal processing. Line calibrations shall be demonstrated

where appropriate.

Tests shall include as a minimum demonstrations of the

following:

(a) Data collection over a continuous period of two

hundred and forty (240) hours to demonstrate

ninety nine point five percent (99.5%) data

reliability for the turbines, substation and

meteorological masts as measured by the

number of ten (10) minute average records

stored.

(b) Local and remote access.

(c) Remote alerts.

(d) Security.

(e) Dial-out alarm message.

(f) Local and remote control.

(g) Software functions as described in the user

manuals including graphical user interface,

presentation of Wind Turbine data, analysis of





(October 2012)

Wind Farm performance, power curves, wind

data analysis and information collected at the

Interconnection Points.

(h) Provision of reports to the agreed format.

1.3.5 Project Acceptance Test

The Project Acceptance Tests consists of the following

steps:

(a) The reliability of the complete Wind Farm shall

be demonstrated by the Wind Farm’s operation

for a total of seventy two (72) continuous hours

without fault. Within this period the Wind

Farm shall be exporting power at approximately

rated capacity (at a minimum of ninety percent

(90%) of this value) to the grid for at least a six

(6) hour continuous period.

(b) The SCADA system shall provide a report of

the Wind Farm availability based on data

gathered over a continuous period of no less

than one hundred and twenty (120) hours. The

Owner shall check and approve the results

presented in the report. It shall be demonstrated

that the SCADA system can undertake this

process automatically.

On successful completion of the Project Acceptance Test

the Project shall have achieved acceptance level and the

Project Acceptance Certificate shall be issued.

With respect to Pre-COD tests, a Pre-COD Acceptance

Certificate shall be delivered when Pre-COD tests meet an

acceptance level following successful completion of the

Acceptance Test for such a Pre-COD test and the ancillary

equipment necessary to operate the Wind Turbines in the

relevant Pre-COD test, as well as the SCADA system

which is necessary to control the operation of the Wind

Turbines and the ancillary equipment in the relevant Pre-

COD test.

Description of

Performance tests

Required result

Achieved

Capacity test

A [As a pre-condition to

the Facility achieving

the Commercial

Operating Date under

the Power Purchase

Agreement, the

Independent Engineer

will need to certify the

Achieved Capacity. If

the Achieved Capacity

falls short of the

Contracted Capacity,

such Achieved

Capacity might

substitute the

Contracted Capacity.

B The Power Purchase

Agreement does not

stipulate the

methodology by which

the Achieved Capacity

is measured.

We understand that it is the

Government's intention that the

methodology of calculating the

Achieved Capacity be a

calculation process and not a

measurement process, so that the

Achieved Capacity will reflect the

nameplate capacity (i.e. so that the

tests will not have to rely on the

wind).]

[Drafting Note: Please note that the Owner might choose

to trigger an Early Operating Period pursuant to clause

4.4 of the Power Purchase Agreement.]





(October 2012)

PERFORMANCE GUARANTEES

[Drafting Note: This Schedule 9 is to be finalised based

on the agreed performance criteria following review of

the proposed detailed design and specification referred

to in the Specification and the PPA.]

The Contractor must meet the following Performance

Guarantees which shall be determined in accordance with

the tests set out below:

1.1 Power Curve Guarantee

1.2 Acoustic Emissions Guarantee

1.3 System Losses

1.4 Reactive Power

LIQUIDATED DAMAGES AND REDUCTIONS IN

THE CONTRACT PRICE

1 DELAY LIQUIDATED DAMAGES

[Drafting Note: The following structure is an example of

the delay liquidated damages that may be listed in this

Schedule.]

1.1 The Delay Liquidated Damages will be

calculated on the basis of a loss of revenue for

early operations.

1.1.1 [Note: Methodology for

calculating delay liquidated

damages to be discussed]

[Drafting note: under clause 4.6 of the PPA is that for

each day that Commercial Operation is delayed beyond

the Scheduled COD, the Operating Period will be

reduced by one day and the Expiry Date will be brought

forward by one day. The effect of this is that the term of

the PPA will effectively be reduced by 2 days for each

day of delay beyond the Scheduled COD. This 2 day

reduction should be factored in when determining the

rate of Delay Liquidated Damages.]

1.2 The aggregate liability for Delay Liquidated

Damages must not exceed [ ]% of the Contract

Price.

1.3 Delay Liquidated Damages must be invoiced

weekly by the Owner and payment will be due

within 30 Days of issue of such invoice.

1.4 At the expiration of 30 Days the amount

invoiced will be a debt due and payable to the

Owner on demand and may be deducted from

any payments otherwise due from the Owner to

the Contractor and the Owner may also have

recourse to the security provided under the

Contract.

2 REDUCTIONS IN THE CONTRACT

PRICE

2.1 Reduction in Contract Price for a failure to

achieve Contracted Capacity :

If the Contractor fails to achieve Contracted Capacity,

the Contract Price shall be reduced by an amount of

[X.XX %] for each 1.00 % (pro-rated for part thereof)

by which the Achieved Capacity falls short of the

Contracted Capacity

3 PERFORMANCE LIQUIDATED

DAMAGES

Performance Liquidated Damages for breach of the

Performance Guarantees are:

3.1 Liquidated Damages - Power Curve

Guarantee

The aggregate liability for Performance Liquidated

Damages for failing to achieve the Power Curve

Guarantee is capped at [ ]% of the Contract Price.

3.2 Liquidated Damages - Acoustic Emissions

Guarantee

The aggregate liability for Performance Liquidated

Damages for failing to achieve the Acoustic Emissions

Guarantee is capped at [ ]% of the Contract Price.

4 OVERALL AGGREGATE LIABILITY

4.1 The overall aggregate liability for Delay

Liquidated Damages and Performance

Liquidated Damages must not exceed [25] %

of the Contract Price.





(October 2012)





(October 2012)

Figure 1 - Overview of test scheme

Commissioning Tests

Acceptance

Test

Certificate

Acceptance Tests

Commissioning Certificate

Pass?

Factory

Acceptance

Test witness / rejec

witness

In

delay Max. delay?

No

Yes

No

Reject

Yes

Retest

OK?

No

Yes

No

Commencement

t





(October 2012)

Figure 2 - Acceptance test details

WTG 1 WTG #

Acceptance

Certificate

Commence

Acceptance

Test

SCADA Electrical

System

Project Acceptance

Test

Civil Works

Note: Fail / re-test procedure within each individual Acceptance Test

Commissioning

Certificate

all Works

Acceptance

Certificate

Acceptance

Certificate Acceptance

Certificate

Facility

Completion

Form

co





(October 2012)

APPENDIX 3

Sample flowchart - interfaces in the performance testing regime for wind farms





(October 2012)





(October 2012)

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